U.S. EXPAT TAX GUIDE – BRAZIL
How do US expats report capital gains from selling a property in Brazil?
If you are a US citizen or green card holder and sell a property in Brazil, you need to report any capital gains to the IRS. The US requires citizens and green card holders to report all worldwide income, including gains from selling property abroad.
Table of contents
Can you exclude capital gains if you lived in the Brazilian property?
If the property was your main home and you lived there for at least two out of the five years before selling it, you might qualify for a capital gains exclusion.
If you’re filing as married filing separately, you can exclude up to US$250,000 of the gain. If you file jointly, the exclusion increases to US$500,000.
Is the entire profit from the sale taxable?
No, you only pay US capital gains tax on the portion of the profit that exceeds the exclusion limit. For example, if your gain from the sale is US$300,000 and you’re filing as a single filer, you would owe tax only on the US$50,000 that exceeds the US$250,000 exclusion.
How does renting out the property affect taxes when selling?
If you rented out the property before selling it, the situation is more complex. The IRS considers the sale of a rental property to be an investment sale.
You will need to account for depreciation recapture, which means paying back the tax benefits you received from claiming depreciation deductions while the property was rented.
Why are rental property sales treated differently by the IRS?
The IRS sees rental properties as income-generating assets, which means that when you sell, they want to ensure all income and expenses are properly accounted for. This includes paying taxes on any depreciation recapture—the amount of depreciation you claimed during the rental period must be “recaptured” and taxed.
What is depreciation recapture, and why is it important?
Depreciation recapture is a tax that applies if you’ve rented out or used your property in Brazil for business and claimed depreciation. Depreciation allows you to deduct the cost of wear and tear on the property. When you sell the property, the IRS requires you to pay taxes on the depreciation you claimed.
- Depreciation Deductions: Depreciation reduces your taxable income while you own the property.
- Recapture Tax: When you sell, the IRS taxes the depreciation you claimed at a rate of up to 25%. For example, if you claimed US$50,000 in depreciation, that US$50,000 will be taxed at the depreciation recapture rate when you sell.
Can US capital losses offset gains from selling a Brazilian property?
Yes, you can use capital losses from other investments in the US to offset capital gains from selling a property in Brazil. This can help reduce the amount of tax you owe.
If you made a profit from selling a property in Brazil, it’s considered a capital gain. You can use any losses from other investments—such as selling stocks or other properties at a loss—to offset that gain.
If your losses are greater than your gains, you can carry over the extra losses to future years. You can use these losses to offset future gains or reduce your taxable income by up to US$3,000 (or US$1,500 if married filing separately) per year.
How do you handle currency conversion when reporting capital gains?
When reporting the sale of your Brazilian property, you need to convert both the sale price and the purchase price to US dollars using the exchange rate at the time of each transaction.
This affects the amount of capital gain or loss you report on your US tax return. Using the correct exchange rates is crucial for accurate reporting and affects the overall tax owed.
Can reinvesting proceeds from the sale defer capital gains tax?
Sometimes you may be able to defer capital gains taxes by reinvesting the proceeds into another property. However, specific rules, like like-kind exchanges (1031 exchanges), usually apply to US properties and may not be available for foreign property sales. It’s best to consult a tax professional to understand your options.
Why should you consider hiring a tax professional?
Selling a property in Brazil as a US citizen or green card holder can create complex tax obligations. A tax professional can help you navigate these rules and make sure everything is filed correctly, including Form 1040, Schedule D, and any other required forms. They can also help you understand depreciation recapture, determine which exclusions or credits you qualify for, and ensure you get all available benefits while staying compliant with IRS regulations.
Are there exclusions for capital gains on foreign property sales?
Yes, if the property you sold was your primary residence for at least two out of the last five years, you may be eligible for a capital gains exclusion. The exclusion amount is US$250,000 for single filers or US$500,000 for those filing jointly. However, if the property was used as a rental, the exclusion may be reduced.
How does the Foreign Tax Credit help with capital gains taxes?
If you paid capital gains tax to Brazil when you sold your property, you may be able to use the Foreign Tax Credit to reduce your US tax liability.
This credit prevents you from being taxed twice on the same income by reducing your US taxes by the amount paid to Brazil. Be sure to file Form 1116 to claim this credit and provide proof of the taxes paid.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
