What Are the U.S. Tax Liabilities for Capital Gains from Property Sales in India?

If you hold dual citizenship in the United States and India, your tax bills are probably fairly complicated. Even if you're a U.S. permanent resident who plans to maintain substantial assets in your home country, you may be subject to a confusing mix of tax rules and regulations. Many of these issues are set forth in a treaty known as the India-United States Double Taxation Avoidance Agreement. This document is designed to prevent dual citizens from paying two sets of taxes on single streams of income. It governs many different types of income, including regular income and capital gains.

If you're selling your house in India, your first priority must be to determine your total Indian tax liability for the sale. If you owned your home for more than two years, you should be able to pay taxes at India's long-term capital gains rate. Although this is currently set at around 20 percent, you may be subject to certain tax surcharges on the sale. Most Indians who sell properties that they've owned for more than two years end up forwarding about 21 percent of the proceeds to the government.

If the property can be treated as a business investment, you may be able to avoid paying part of this obligation. If you purchased the property more than 15 years ago, this is especially likely. First, you'll need to find the appraisal value for the house on the date of your purchase. Subtract this value from the home's total sale price. Next, you'll need to subtract the value of the improvements that you made to the house from this amount. This difference will represent the total amount for which you'll be liable for paying Indian taxes. In most cases, it will be substantially less than the amount that you would otherwise have paid.

To calculate your U.S. tax liability for this sale, you'll need to determine the current American tax rate on long-term capital gains. In accordance with the double-taxation treaty, you'll be able to subtract the total amount of Indian taxes for which you were liable from your expected American tax liability. Since the current U.S. long-term capital gains tax rate is set at around 20 percent for most taxpayers, it's unlikely that you'll have a significant U.S. tax liability for the sale of your Indian property. As such, you'll be able to "import" the proceeds from your sale into the United States without fear of incurring additional tax liabilities.

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