Capital Gains Tax on Property in Australia
When you leave the U.S. for Australia and intend to stay indefinitely, you might wonder how much of what you own will be potentially subject to U.S. capital gains tax. As an American living in Australia, it’s important to know about the taxes imposed by both of your countries.
Worry no more – we’ve got your back! Throughout this blog post, our specialist in Australian tax will mention everything from exemptions and deductions to reporting obligations and penalties so that you can make sure all bases are covered.
Table of Contents
What is the cost of selling a property in Australia?
Americans may be liable for capital gains taxes when they sell their primary residence in Australia. This is because under Australian law, if they haven’t lived and owned the property for at least two of the previous five years, it will be considered a taxable transaction. Joint return filers are exempt from taxation up to $500,000 and single return filers are only exempt from taxation up to $250,000.
What expenses on the renovated property can be deducted from the profits before paying capital gains taxes?
When renovating your own home in Australia, don’t include labor costs because these are not calculated. However, all materials used can be included in the estimated cost of construction. All of your selling costs and renovations are covered after you purchase your home and you still have $250,000 in capital gains available to you.
How much will the IRS tax me over the $250,000 exemption?
When a share is sold, it is treated as a capital asset. When you sell this asset after holding it for more than a year, you’ll be taxed at the long-term capital gains rate of 15%; if you’re in the top tax bracket and sell a property like this, you’ll be taxed at 20%. Including the sale profit of the property is necessary. A house you bought in Australia 20 to 25 years ago will earn you a huge profit that, when combined with your other income, would be enough to put you in the 20% bracket.
Is it possible to earn $500,000 in capital gains tax-free if I include my Australian spouse on my U.S. tax return?
Adding your spouse to your property requires that you make certain choices with the IRS; this includes obtaining an Individual Taxpayer Identification Number (ITIN) and filing various forms. The IRS may not take kindly if your Australian spouse owns many assets or has high income. All the tax planning that Australians do will also fall under American taxation rules. In the case of U.S. citizens who own 100% of the property and who have significant taxable income on their returns, bringing their spouse into the U.S. tax system may be a good idea to eliminate their foreign tax burden.
Would it be okay to include my Australian spouse to my U.S. tax return, despite having no connection to the U.S?
Some elections are binding, while others only apply in particular years. You should get expert advice before making these decisions. A non-spouse resident, filing with a taxpayer identification number on their return if they did not previously have one, may have unintended consequences.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
STREAMLINED AMNESTY
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
Is it necessary for me to pay U.S. tax if I have rental income from Australia?
You won’t be required to pay taxes on your rental property. Consequently, there would be no double taxation at the federal level if the government’s positive cash flow from renting offsets foreign taxes.
If I have a rental property in Australia and sell it, how will it appear on my U.S. tax return and is it the same on the American side in terms of capital gains?
You may be able to apply a foreign credit against your US taxes if you have paid taxes on your Australian rental property. The current exchange rate must be taken into account when calculating the cost price of the property. Include any improvements made to the property over the years; these are also included in the value of the property. If you claim rental expenses on your U.S. tax return, you build up your cost basis over time. When you sell your home and want to claim a deduction, you need to recalculate how much of its income is taxable. Taxes on U.S. capital gains are calculated on the amount that is taxable, but no exemptions or deductions are required.
We can use ATO tax dollars to offset some U.S. tax on your rental property if you have to pay tax on it. In any case, there is no difference between tax statements: the date and taxation are both the same, so we can always use foreign credits. Their systems are vastly different when it comes to selling primary residences.
Would it be better if I marry an Australian and put a rental property totally in their name?
Putting all non-U.S. assets in the name of your Australian spouse is a smart move. The advantage of that is there will be no U.S. taxes to pay. We recommend getting personalized advice for this but if not possible, at least make sure anything is put under their name so no problems will occur with taxation or legal issues when dealing within other countries.
Is it permissible to include my non-American spouse if all of the tax I paid in ATO would be credited on my U.S. tax return?
Keep track of all your expenses and record every time you got in or made an improvement to something. Maintaining a good record throughout your ownership period is the best thing you can do. You simply want to be sure that when it’s time to file your taxes, you’ve kept a good record of everything you spent, since everything you claim as an expense was an adjustment, which means you won’t have to pay taxes on it.
Can I simply deposit a large sum of money into my superannuation account?
This is an area where we must handle properly. Keep in touch so we can help. We can look at your superannuation balance and various contributions throughout the year you’ve worked. It is not clear from the IRS how much money you should invest in your superannuation account, so adding a large amount could have negative consequences. We can put on a certain amount without triggering any U.S. implications if you want to. By checking your account, we will be able to determine what your limit is without harming yourself.
What happens to a portion of your superannuation plan when you retire, and do I have to pay U.S. tax on it?
As an American, you are subject to taxation on your superannuation plan. Taxable income falls under a section of the tax code called “pension,” and is therefore taxed based on where this line falls under different tax brackets. There isn’t much we can do about the tax implications of the money being taken out of the account once it starts coming in, except mitigate taxes as best as we can.
What is the best way for me to reduce the damage before I retire? Is it simply ensuring that I file my annual tax return and maximize my superannuation income each year?
Superannuation contributions from your employer are one more source of income for you, and they can be locked up so that you cannot access them until certain times. American workers, however, consider this money to be just another component of their pay. When we include these contributions on our tax return, we ensure that their impact has been taken into account when determining the amount of capital gains tax, we may have to pay down the road if necessary. We have this foreign tax credit that allows us to withdraw funds without paying any additional taxes if you already pay a lot of tax on your Australian wages.
In other words, if you earn $5,000 per month plus $1,000 in superannuation, you don’t report the $5,000 to the IRS; you report the $6,000 rather because you paid more tax in Australia than the U.S., and the foreign tax credit offsets the entire $6,000. A portion of the growth may be allocated to you, such as the amount that will be included between this year and twenty years from now. If you accumulate $1,000 in interest twenty years before retiring, you are not taxed. The current law does not impose a flat rate tax on income when a bracket is reached. You can take advantage of this especially if your income is rising because of a change in the tax rate or bracket, since foreign exclusions are exempted only when filing an annual return or whatever bracket you are in at the time.
Is there anything that can be done to lessen the agony of the IRS imposing a tax-free threshold and then requiring you to pay tax on anything above it?
Any regular deductions will still be admissible for the standard deduction, or if you itemized, they will still be recognized as income. Those who do not have any other income than superannuation and want to rely on their U.S. tax return should hire a good tax consultant so they can make sure they take advantage of every advance they can when it comes to filing their tax returns.
Contact us at Expat Tax Online to learn more about tax implications of selling your property in Australia and managing and planning your Superannuation in relation to U.S. tax.
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