u.s. expat tax guide – brazil
How do US expats report Brazilian property sales to the IRS?
If you are a US citizen or green card holder who sold a property in Brazil, you must report any profit from the sale to the IRS.
The IRS requires that all income, including gains from property sales abroad, be reported.
Can you exclude some of the profit if it was your primary home?
Yes, you might be able to exclude part of the profit if the property was your main home for at least two of the five years leading up to the sale.
Single filers can exclude up to US$250,000, while married couples filing jointly can exclude up to US$500,000.
Do you have to pay tax on all of the profit?
No, you only pay tax on the profit that exceeds the exclusion limit. For instance, if you made a profit of US$300,000 and qualify for a US$250,000 exclusion, you would only pay tax on the remaining US$50,000.
What if the property was rented before being sold?
If the property was rented out before being sold, it becomes more complicated. The IRS considers it an investment property, which means you have to deal with depreciation recapture. This means paying tax on any depreciation that you previously deducted.
Why does the IRS handle rental property sales differently?
The IRS treats rental properties as income-generating assets. When you sell a rental property, you need to pay taxes on any depreciation you previously claimed. This is known as depreciation recapture, which ensures you pay tax on the tax benefits you received.
What is depreciation recapture and how does it affect you?
Depreciation recapture is a tax on the depreciation deductions you took while owning the property. If you claimed depreciation, it reduced your taxable rental income over the years, but you must pay tax on it when you sell.
The rate can be as high as 25%. For example, if you claimed US$50,000 in depreciation, you would need to pay tax on that amount at the recapture rate when you sell.
Can you offset gains with losses from other investments?
Yes, you can use capital losses from other investments in the US to reduce the capital gains tax you owe on the sale of a property in Brazil.
If your losses exceed your gains, you can carry forward the extra losses to future years and use them to offset other income, up to US$3,000 per year.
How do you convert sale amounts from Brazilian Reais to US Dollars?
When reporting the sale, you need to convert the purchase price and the sale price from Brazilian Reais to US Dollars.
Use the exchange rate that was in effect on the date of each transaction. Accurate conversion is crucial because it directly affects the capital gain or loss you report.
Can you reinvest to defer paying capital gains tax?
In some situations, you can defer capital gains taxes by reinvesting the proceeds, usually through a like-kind (1031) exchange.
However, 1031 exchanges typically only apply to US properties and may not be available for foreign property sales. Consult a tax professional to see if any options are available for you.
Is it worth hiring a tax professional when selling property in Brazil?
Yes, hiring a tax professional is highly recommended. Selling property in Brazil can lead to complex tax issues in the US, including forms like Form 1040, Schedule D, and understanding depreciation recapture.
A tax expert can help you make sure everything is reported accurately and that you take advantage of any credits or exclusions you are eligible for.
Are there special exclusions for capital gains on foreign properties?
Yes, if the property was your primary residence for at least two out of the last five years, you may qualify for an exclusion on the capital gains. Single filers can exclude up to US$250,000, and couples filing jointly can exclude up to US$500,000. However, if the property was also used as a rental, the exclusion may be reduced.
How can the Foreign Tax Credit reduce your capital gains tax?
If you paid capital gains tax in Brazil, you could use the Foreign Tax Credit to lower your US tax liability. This helps prevent you from paying tax twice on the same income.
To claim the Foreign Tax Credit, file Form 1116 and provide proof of the taxes you paid in Brazil.
