Is Capital Gains Tax owed to the IRS upon property sale?
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The answer to this is actually – ‘it depends.’ There are a few different factors that could impact your Capital Gains Tax. One of these is the location of the property seller’s primary residence. In some instances, if property sellers reside in countries other than the United States, they are not required to pay Capital Gains Tax on the sale of their primary residence. If you don’t pay Capital Gains Tax locally, then you won’t have a Foreign Tax Credit to offset the tax with the IRS. In particular, Capital Gains Tax isn’t charged in the United Kingdom and Australia when a person sells their primary residence.
Is there an exclusion on the sale of your principal residence?
In some specific cases, there is an exclusion on the sale of principal homes. If you are a single tax filer you may be eligible to exclude around $250,000 of the net capital gain under the U.S. Tax Return. However, if you file jointly with a spouse you may be entitled to exclude up to $500,000 of that gain. Anything exceeding this exclusion amount will be taxed on your U.S. Tax Return.
To better illustrate this, if you were a single person living in the UK and wanting to sell your principal residence, the UK government would not charge you any capital gains, however, the IRS will. Usually, the first $250,000 profit would not be taxed as a capital gain, but anything that exceeds this may be.
How can you calculate your profit on the property that you are selling?
To calculate your profit, you must take note of the holding period of the property. If you have treated it as your main residence and have lived in it for two out of the five years prior to the sale date, then you may qualify for the exclusion. Similarly, any amount that exceeds it will then be taxed, and that tax will actually depend on the length of the holding period.
Do you need to have documentations and receipts to help you prove that you spent money on your property while you were still owning it?
It is always advisable to keep the receipts for any work completed on your property. While these may not be required, they will give sufficient proof if anyone questions your claims.
If you were married to a non-US person who co-owned the property you are selling, should you pay Capital Gains Tax on just the half of it, or should you pay the full amount?
In this case, you would only need to pay your share. Because your spouse is a non-U.S. citizen, their share would not be taxed on the U.S. Tax Return unless you elect to treat your spouse as a U.S. citizen to increase your deductions and to minimize tax rates.
Depending on your individual scenario, this method may have varying rates of success. However, it should be kept in mind that if the non-U.S. spouse undergoes election, their worldwide income may end up being taxable on the U.S. Tax Return.
The answer to this question greatly depends on the situation, so it is always advisable to consult a tax professional before making any kind of commitment.
I want to know more about US Taxes abroad
Can you deduct anything else from the profit before it is taxed by the IRS?
Selling property can sometimes come with costs that we haven’t always factored in. For instance, you, like many other property sellers, may have spent money beforehand on renovations and conveyancing to ensure your property is appealing to the market. As some of these costs may feel like necessities, it is only natural to want to claw back some of that money before the IRS reaches out to you.
To understand other possible deductions you could make, you will first need to recognize the enhancement costs of making these changes. These become part of your overall costs. You can even claim improvement reductions to a property if you have made significant changes to add value, even while you still lived there. Increasing your property’s value will reduce your capital gains.
Next, you will need to look at the selling expenses involved in your sale (e.g. commissions, advertisement-related expenses, legal fees, notary fees, settlement fees, etc.)
As a sample scenario, let us assume that you have made a profit worth $500,000. After deducting all of the selling costs and property-improvement expenses, what remains with you is a profit that amounts to $400,000. Given that the IRS would not charge you for the first $250,000 (as a single seller), the tax still leaves $150,000 worth of profit.
Then, to determine the amount that the IRS will tax you, you must ascertain whether the capital gain is short-term or long-term and also understand the foreign exchange rates. To do this you should take note of the exchange rates on the day that you bought your property and what these rates were on the day you sold it. Having these figures will allow you to immediately ascertain if you have made a foreign exchange gain or loss.
In a nutshell, before paying the Capital Gains Tax, you must take note of the selling price of the property and deduct any selling and enhancement expenses. Also, be aware that the IRS would give you an exclusion amount that would depend on whether you are single or filing jointly with your spouse; anything that exceeds this amount may be taxed.
