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. Capital gains are calculated as the difference between what you paid for the property (adjusted for certain expenses) and what you sold it for. As a US citizen or green card holder, this rule applies to you regardless of where the property is located.
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How does US capital gains tax apply to foreign property sales?
To calculate capital gains, subtract the cost basis (purchase price plus any major improvements) from the selling price. Expenses like agent fees and legal costs can also reduce the taxable amount.
- Purchase price: The amount you originally paid for the property.
- Improvements: Major renovations, such as installing a new roof or remodeling a kitchen, that increase the property’s value.
- Selling expenses: Costs like real estate agent fees, legal fees, and closing costs.
Example:
If you purchased a property for US$200,000, spent US$30,000 on improvements, and sold it for US$400,000, your capital gain would be US$170,000 (US$400,000 – US$230,000).
Can you use foreign taxes to reduce US taxes?
Yes. If you paid Chilean taxes like the first category tax or complementary tax, you can claim a Foreign Tax Credit (FTC) on your U.S. return. This helps prevent double taxation. Some taxes, like the special tax of Article 21°, may not qualify for the credit, so check the rules carefully.
Does how long you owned the property affect taxes?
Yes. The IRS distinguishes between short-term and long-term capital gains:
- Long-term capital gains: If you owned the property for more than one year, your gains are taxed at a lower rate, typically between 0% and 20%, depending on your income level.
- Short-term capital gains: If you owned the property for one year or less, the profit is taxed at your regular income tax rate, which is often higher.
How does the US tax different types of foreign property?
The US government taxes foreign properties differently depending on their use, such as primary residences, inherited properties, or rental properties. US citizens and green card holders must report these properties and pay taxes accordingly, even if the property is located abroad.
Are there tax breaks for selling a primary residence?
If the property was your main home for at least two of the last five years before selling, you may qualify for a significant tax break:
- Single filers: You can exclude up to US$250,000 of capital gains.
- Married filing jointly: You can exclude up to US$500,000 of capital gains.
Example:
If you’re married and sell your home for a US$200,000 profit, the entire amount is excluded under the US$500,000 limit, so you owe no US taxes on the sale.
What happens if you’re married to a non-US citizen?
If you’re married to someone who isn’t a US citizen and you file separately, your exclusion limit is reduced to US$250,000. Additionally, if the property is jointly owned, the IRS only taxes your share of the gain.
Example:
If the total profit from a property sale is US$300,000 and you own half, your share is US$150,000. This amount would be fully excluded if it falls under the US$250,000 limit.
How are rental or investment properties taxed?
Selling a rental or investment property involves additional considerations:
- Full taxation of gains: The entire gain is taxable unless offset by deductions or credits.
- Depreciation recapture: If you claimed depreciation on the property while renting it out, the IRS requires you to pay tax on the amount of depreciation deducted, even if the property’s value increased.
Example:
If you claimed US$50,000 in depreciation over several years and sell the property, you must pay tax on that US$50,000 as part of the gain.
Can Chilean taxes reduce your US tax burden?
Yes, taxes paid in Chile on the sale of your property can be used to offset US taxes through the Foreign Tax Credit (FTC). This credit ensures you aren’t taxed twice on the same income.
How do you report property sales to the IRS?
To report the sale, use the following forms:
- Schedule D (Capital Gains and Losses): Calculate the total gain or loss from the sale.
- Form 8949: If you qualify for the home sale exclusion, report the sale and show the IRS how much of the gain is excluded.
Even if no taxes are owed due to exclusions, the sale must still be reported to the IRS to ensure compliance.
What are simple tax planning strategies for US expats in Chile?
For US expats living in Chile, good tax planning means understanding both countries’ tax rules and finding ways to lower taxes.
Chile taxes residents on their worldwide income and non-residents on income earned in Chile. If you become a tax resident in Chile, you’ll pay progressive tax rates from 0% to 40%. After a certain time, Chile may also tax your global income with a global complementary tax.
How does the US-Chile tax treaty affect expats?
The US-Chile tax treaty helps expats avoid being taxed twice and explains how to handle income like capital gains, dividends, and royalties. For capital gains, the country where the property is located—in this case, Chile—has the primary right to tax.
However, the US allows you to use the Foreign Tax Credit (FTC) to reduce your US taxes by the amount paid in Chile. Dividends and interest income are subject to lower withholding tax rates, typically between 5% and 15%, which reduces the taxes you owe on these types of income.
Royalties are taxed in the country where they are earned, but the treaty sets limits to prevent high withholding taxes. The treaty also defines tax residency based on where you live most of the time or have a permanent home. Business profits are taxed where the business operates, ensuring fair treatment under transfer pricing rules.
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 Chile. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
