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U.S. EXPAT TAX GUIDE โ€“ INDIA

What should US citizens know before selling property in India?

If you’re a US citizen or Green Card holder and you sell property in India, you need to report the sale to the IRS. The US tax system requires you to report income earned anywhere in the world, including profits from selling property abroad.

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Even if you already paid taxes in India on the sale, the IRS still expects you to include it on your US tax return.

In India, capital gains tax is calculated using indexed pricing, which adjusts the purchase price to account for inflation. This method lowers the taxable profit in India. Meanwhile, the US uses the original purchase price as the cost basis.ย 

Because of this difference, you might report a higher gain in the US than in India, leading to different tax outcomes.

Can you use the US$250,000 exclusion for property sales?

If the property was your main home and you lived in it for at least two of the last five years, you may qualify for the US$250,000 capital gains exclusion. Married couples filing jointly can exclude up to US$500,000 of profit.

For instance, selling a home with a US$400,000 profit would allow a single filer to exclude US$250,000, leaving only US$150,000 taxable. This exclusion applies only to primary residences, not to rental or investment properties.

What expenses can US expats deduct from property sales?

When calculating your taxable gain, you can deduct certain expenses related to property improvements and selling costs. These include:

  • Renovations like kitchen or bathroom upgrades
  • Structural changes, such as adding a new room
  • Electrical or plumbing improvements
  • Roof replacements
  • Landscaping projects that increase property value
  • New windows or flooring
  • Major repainting and similar upgrades

Selling-related costs, such as real estate agent fees, legal charges, and registration costs, are also deductible.ย 

For example, spending US$50,000 on renovations and US$10,000 on fees could lower the taxable gain from a US$400,000 profit to US$340,000 before applying exclusions.

How does renting out your property affect taxes?

If you rented the property and did not live in it for at least two of the last five years, you wonโ€™t qualify for the US$250,000 exclusion. In this case, the entire gain becomes taxable in the US. However, you can still claim deductions to reduce the tax owed.

Rental properties also involve depreciation. This allows you to deduct part of the propertyโ€™s value each year it was rented. When selling, however, the IRS requires you to recapture this depreciation. The total depreciation claimed is added back to your taxable gain.

How does India tax rental properties compared to the US?

In India, rental income is taxed with a flat 30% standard deduction on gross rental income. In the US, you can deduct specific expenses, including depreciation, repairs, and maintenance, often reducing taxable income significantly.

When selling, India uses indexed pricing to adjust for inflation and lower the taxable profit. The US relies on the original purchase price as the cost basis and includes depreciation recapture. This can lead to higher taxable gains in the US.ย 

For example, a sale that results in a US$50,000 gain in India might show a US$200,000 gain in the US due to these differences.

What are phantom gains and how do they affect you?

Phantom gains occur when currency exchange rates change between the time you buy and sell a property. If the rupeeโ€™s value drops, you might need fewer dollars to repay a rupee-based mortgage, but the IRS could treat this difference as taxable income.

For example, borrowing US$100,000 worth of rupees for the purchase and later repaying only US$80,000 due to currency changes might result in a US$20,000 taxable gain in the US. Unfortunately, currency losses are not deductible, even though gains are taxable.

How can you lower taxes on property sales in India?

To reduce taxes when selling property in India, consider these steps:

  • Deduct improvement costs: Account for upgrades that added value to the property.
  • Include selling expenses: Deduct realtor fees, legal charges, and related costs.
  • Claim foreign tax credits: Use credits for taxes paid in India to offset US taxes.
  • Check for primary residence exclusion: If eligible, exclude up to US$250,000 (or US$500,000 for couples) of the gain.
  • Plan for depreciation recapture: Understand how it affects your taxable gain and prepare for it.

Working with a tax professional familiar with both US and Indian tax systems can help you use deductions and credits effectively, ensuring you donโ€™t overpay.

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.

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