u.s. expat tax guide – chile
How does the IRS handle Capital Gains from selling property in Chile?
If you sell property in Chile, the IRS requires you to report any profit, known as capital gains, on your US tax return. The taxable gain is the difference between the purchase price (including certain expenses) and the selling price.
Even if you paid capital gains tax in Chile, you must still report the sale in the US.
The IRS taxes worldwide income, meaning that property sales outside the US are subject to capital gains tax, regardless of location. If you’re a US citizen or green card holder, this rule applies to you.
How does the US Capital Gains Tax apply to foreign property sales?
When selling a property, your capital gain is calculated using the following formula:
Selling Price – (Purchase Price + Improvements + Selling Expenses) = Capital Gain
- Purchase Price: What you originally paid for the property.
- Improvements: Major upgrades, such as structural renovations or kitchen remodeling, that increase the property’s value.
- Selling Expenses: Costs like real estate agent commissions, legal fees, and closing costs.
Example Calculation:
- Purchase Price: US$200,000
- Improvements: US$30,000
- Selling Price: US$400,000
- Capital Gain: US$170,000 (US$400,000 – US$230,000)
Can you use foreign taxes to reduce US taxes?
Yes. If you paid Chilean capital gains tax, you can claim a Foreign Tax Credit (FTC) on your US tax return to offset your US tax liability.
However, not all Chilean taxes qualify. For example, the special tax of Article 21° may not be eligible. Since tax regulations can be complex, consulting a tax expert is advisable to ensure proper reporting and to maximize deductions.
Does the length of property ownership affect US taxes?
Yes, the IRS applies different tax rates based on how long you owned the property before selling:
- Long-Term Capital Gains (held over 1 year): Taxed at 0%, 15%, or 20%, depending on income level.
- Short-Term Capital Gains (held 1 year or less): Taxed at ordinary income tax rates, which can be higher.
Since long-term rates are lower, it’s beneficial to hold the property for at least one year before selling.
How does residency status affect Capital Gains Tax on property sales in Chile?
- Tax residents pay taxes on worldwide income, including income from property sales anywhere in the world.
- Non-residents pay taxes only on Chilean income, including gains from selling property in Chile.
What taxes apply when selling property in Chile?
- Capital Gains Tax: Chile applies a 10% tax on capital gains from real estate sales if it is a primary residence and meets certain conditions.
- Personal Income Tax: If the property is not a primary residence, gains may be taxed at progressive rates between 0% and 40%.
- Corporate Property Sales: If the property is owned by a Chilean company, a 27% corporate tax applies.
How does the US tax property sales abroad?
- The US taxes capital gains on worldwide income, so any profit from selling a Chilean property must be reported.
- Short-term capital gains (held one year or less) are taxed at ordinary tax rates (10%-37%).
- Long-term capital gains (held more than one year) are taxed at 0%, 15%, or 20%, depending on income.
Are there tax breaks for selling a primary residence?
If the property was your primary residence for at least 2 of the last 5 years, you may qualify for a capital gains exclusion:
- Single filers: Exclude up to US$250,000 in capital gains.
- Married filing jointly: Exclude up to US$500,000 in capital gains.
Example:
- A married couple sells their home for a US$200,000 profit.
- Since this amount is below the US$500,000 exclusion limit, they owe no US taxes on the sale.
If the property does not qualify as a primary residence, the full capital gain is taxable.
How are jointly owned properties taxed for US expats?
If you own property with a non-US citizen spouse, your tax treatment changes:
- If filing separately, your exclusion is limited to US$250,000, not US$500,000.
- If you own 50% of a US$300,000 gain, your taxable share is US$150,000, which may still be eligible for an exclusion.
How are rental and investment properties taxed?
Selling a rental or investment property has additional tax considerations:
- Full Taxation of Gains – The entire gain is taxable.
- Depreciation Recapture – If you claimed depreciation deductions while renting, the IRS requires you to pay tax on those deductions at a rate of up to 25%.
Example:
- Total depreciation claimed: US$50,000
- Tax owed on recaptured depreciation: US$50,000 x 25% = US$12,500
Even if the property’s value increased, you must repay tax on depreciation deductions previously taken.
Can Chilean taxes reduce your US tax burden?
Yes, taxes paid in Chile on the sale of your property can be used to reduce your US taxes through the Foreign Tax Credit (FTC).
Example:
- Capital Gain in Chile: US$50,000
- Chilean Tax Paid: US$10,000
- US Tax Due: US$8,000
- Foreign Tax Credit Applied: US$8,000 (US tax eliminated)
Since Chile’s tax was higher than the US tax owed, you would not owe additional US taxes on the sale.
To claim this credit, file Form 1116 (Foreign Tax Credit) with your return.
How do you report property sales to the IRS?
To properly report the sale, file these forms with your US tax return:
- Schedule D (Capital Gains and Losses): Summarizes capital gains and losses from property sales.
- Form 8949: Lists transaction details and exclusion amounts (if applicable).
Even if no taxes are owed due to exclusions, you must still report the sale.
What are the withholding tax requirements when selling property in Chile?
If you are a non-resident seller, Chilean tax laws require buyers to withhold a portion of the sale price for tax purposes.
Who is subject to withholding tax?
- Non-resident individuals selling property in Chile
- Foreign companies that own real estate in Chile
- US expats classified as non-residents for tax purposes in Chile
How much is withheld?
- For individuals: The buyer must withhold 10% to 35% of the sale price, depending on income level.
- For corporations: Companies selling real estate face a 27% corporate tax and an additional 35% withholding tax on profits sent abroad.
Tax Treaty Reductions: Some expats may qualify for reduced withholding under tax treaty rules.
What are simple tax planning strategies for expats in Chile?
Expats can reduce taxes through careful planning:
- Hold property for at least 1 year – Qualifies for lower tax rates.
- Use the Primary Residence Exclusion – Exclude up to US$250,000 (single) or US$500,000 (married).
- Apply Foreign Tax Credits – Offset US tax liability with Chilean taxes paid.
- Account for Depreciation Recapture – If you deducted depreciation, prepare to pay tax on it when selling.
- Report Everything – Failing to report foreign property sales can result in penalties.
How does the US-Chile tax treaty affect expats?
The US-Chile tax treaty helps expats avoid double taxation and provides guidelines for handling capital gains, dividends, and royalties.
- Capital Gains: Chile has primary taxing rights, but US taxes can still apply.
- Dividends and Interest: Withholding tax rates range from 5% to 15%, reducing US tax liability.
- Royalties: Chile taxes royalties where they are earned, but treaty limits withholding taxes.
