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As a Saudi with US citizenship, will the US charge capital gains tax on the sale of my Saudi home?

In Saudi Arabia, there is no capital gains tax imposed on individuals buying and selling property. However, those who also hold US citizenship must report any capital gains to the IRS and may be subject to US capital gains tax.

Key Takeaways:

  • Capital gains tax implications vary significantly between selling a principal residence and a rental property.
  • Home improvements can adjust your cost basis and potentially reduce taxable gains.
  • Depreciation recapture on rental properties can increase your tax liability.
  • Engaging in pre-sale tax planning with a professional can help mitigate unexpected tax burdens.
  • Proper reporting of foreign rental income and adherence to filing requirements, including Form 8858, is essential for US expats.

Principal Residence vs. Rental Property

  • Principal Residence: If you’ve lived in your property as your main home for at least two out of the five years preceding the sale, you’re eligible for a significant exclusion on capital gains.

    For single filers, this exclusion is up to US$250,000, and for married couples filing jointly, it’s up to US$500,000. This means if your net gain from the sale falls within these limits, it may not be taxable.
  • Rental Property: The scenario changes when dealing with rental properties. Here, no such exclusion applies. Instead, you must consider the property’s cost basis, sale proceeds, and any improvements made to determine the net gain or loss.

    Additionally, depreciation recapture comes into play, potentially adding to your tax bill.

What if I add improvements to my property?

Improvements like adding a swimming pool can be factored into the property’s cost basis, potentially reducing the taxable gain. However, it’s essential to document these expenses accurately, as not all costs may qualify.

What happens if I want to sell my rental property?

For rental properties, the focus shifts to the original purchase cost, sale proceeds, and the property’s depreciation over time. The IRS mandates recapturing depreciation, which means previously claimed depreciation deductions will be subject to tax upon sale. This recapture tax is separate from any capital gains tax on the sale.

Should I get a tax professional before making a decision?

Yes, you should. Engaging a tax professional to run hypothetical calculations before selling can provide clarity on potential tax impacts. This approach helps with making informed decisions, especially in fluctuating markets, to ensure that the timing of the sale aligns with optimal tax outcomes.

Where should I report my rental income?

Rental income from properties outside the US must be reported on Schedule E of your tax return. Additionally, Form 8858 is required for foreign rental properties, foreign self-employment income, and ownership in foreign companies.

This form is crucial for detailing the specifics of your foreign investments.

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