Capital gains on my foreign property?
One of the most frequent questions we are asked, is “will I pay capital gains tax in the US, if I sell my New Zealand/Australian based property?”.
Unfortunately, the answer to this one is…maybe.
Capital gain in a simplified format is: selling price – (purchase price + improvements and selling costs) = capital gain.
Whilst there currently is no capital gains tax on the sale of property in New Zealand, and limited capital gains tax in Australia, the US does tax most capital gains (including the sale of a home).
The question which we would first ask, is whether this is the sale of your home, or a rental/investment property?
Selling your home
The IRS offers an exclusion of capital gain to taxpayers selling their home, provided you have lived in the property for at least two of the last 5 years. The 2 years do not need to be continuous, and can be spread out over the 5-year period. This exclusion is $250,000 for single individuals, or $500,000 for married taxpayers filing jointly.
This exclusion can be claimed once every two years.
You may be able to take a partial exclusion of gain, should you have lived in the property for less than two years, if one of the following conditions are met:
- You sold your property due to a work-related move
- You sold your property due to a health-related move
- Or other unforeseeable events
Each of the above requires consideration of a number of factors, and should definitely not be used as an attempt to exclude capital gain without fully understanding the requirements to qualify.
It is important to note, that any non-qualified use (ie renting it for a period), will affect your exclusion. In the case that you lived in a property for 3 years (ie 2013, 2014, and 2016) but rented it out for one year in 2015, you would then have a reduced exclusion. We would prorate the exclusion amount by the amount of unqualified use (rental period).
Selling your investment/rental property
Unfortunately, this one is far more black-and-white. If a gain has been made, it is possible that you will be liable to pay capital gains tax in the US.
When selling your investment/rental property, it is incredibly important to keep records of improvements made to the property, and also of any purchase or selling costs paid by you. All of these will help reduce the capital gain you have made (however any depreciation taken will increase the gain made).
Capital losses can also have an impact on your tax return, subject to certain limits.
Does your tax preparer understand the capital gain rules? If not, or if you have any questions, contact us today on 09 373 2949 (NZ) or 02 8332 6120 (AU).