U.S. Citizen Selling Property in India: Tax Obligations

A U.S. citizen selling property in India is subject to the tax laws of both countries. India taxes the sale because the property is located there, while the U.S. taxes its citizens on their worldwide income. This requires understanding two different sets of rules for calculating gains and reporting the transaction. The sale first triggers an Indian tax liability, followed by a U.S. tax reporting requirement on the same gain. While this creates the potential for double taxation, tax agreements between the countries provide relief, primarily through the U.S. Foreign Tax Credit.

Indian Tax Obligations on Property Sale

When a U.S. citizen sells property in India, the first tax obligation is the Tax Deducted at Source (TDS). Indian law requires the buyer to withhold a portion of the sale price and remit it to the Indian Income Tax Department for the seller. The buyer must provide the seller with a TDS certificate, which serves as proof of tax payment in India.

The withholding rate is determined by the property’s holding period. If the property was held for more than 24 months, it is a long-term asset, and tax is withheld at 20%; if held for 24 months or less, the rate is 30%. A 4% health and education cess and applicable surcharges are added to these rates. This total percentage is applied to the entire sale price, but a seller can apply for a certificate to have TDS deducted on the lower capital gain amount.

For long-term gains, Indian tax law allows for an “indexed cost of acquisition.” This lets the original purchase price be adjusted for inflation using a government-notified Cost Inflation Index. This adjustment increases the property’s cost basis, reducing the taxable capital gain.

Indian tax law also provides avenues for reducing capital gains tax if the sale proceeds are reinvested in specified assets within India. For instance, gains from selling a residential house can be exempt if used to purchase another residential property in India within a prescribed timeframe. These exemptions require strict adherence to timelines and investment criteria, and the reinvestment must be within India.

United States Tax Obligations on Property Sale

The U.S. requires its citizens to report all worldwide income, so the profit from selling property in India must be reported on a U.S. tax return. The gain must be calculated according to Internal Revenue Service (IRS) rules, which differ from the Indian computation. This is done by establishing the cost basis and sale price in U.S. dollars.

The original purchase price must be converted from Indian rupees to U.S. dollars using the exchange rate on the date of purchase. The final sale price must be converted using the exchange rate on the date of sale. Any costs for capital improvements are converted based on the exchange rates when those expenses were incurred. This can result in a foreign currency gain or loss, which is calculated separately from the property’s capital gain.

Unlike in India, the IRS does not permit indexing the cost basis for inflation. The U.S. cost basis is the original purchase price in U.S. dollars, plus capital improvements, less any depreciation claimed for rental use. This often results in a higher taxable gain for U.S. purposes compared to the gain calculated under Indian law.

The U.S. tax rate depends on the holding period. A property held for more than one year qualifies for long-term capital gains rates of 0%, 15%, or 20%, depending on the taxpayer’s income. If held for one year or less, the gain is short-term and is taxed at the individual’s higher ordinary income tax rates.

Preventing Double Taxation with the Foreign Tax Credit

The U.S. and India have a Double Taxation Avoidance Agreement (DTAA) to prevent double taxation. The primary tool for a U.S. citizen is the Foreign Tax Credit (FTC). The FTC allows a taxpayer to subtract income taxes paid to India from their U.S. income tax liability.

The Indian capital gains tax paid, including the TDS amount, can be claimed as a credit against U.S. taxes owed on the property sale. This credit reduces the U.S. tax bill on a dollar-for-dollar basis. For example, if a U.S. citizen owes $30,000 in U.S. tax on the sale and paid $22,000 in Indian tax, the credit reduces their final U.S. tax liability to $8,000.

The FTC ensures the total tax paid is the higher of the two countries’ tax rates, not the sum of both. However, the credit is limited to the amount of U.S. tax owed on the foreign-source income. A taxpayer cannot use excess foreign taxes from the property sale to offset U.S. taxes on their U.S.-source income. The credit can only neutralize the U.S. tax on that specific foreign gain.

Required Information and Key Tax Forms

Reporting the sale and claiming the Foreign Tax Credit requires specific documentation, including:

• The original purchase agreement or deed.
• The final sale agreement.
• Receipts and invoices for capital improvements.
• Proof of Indian taxes paid, such as the TDS certificate.
• Historical exchange rate data for purchase, improvement, and sale dates.

The sale is reported on Form 8949, Sales and Other Dispositions of Capital Assets. This form requires details like acquisition and sale dates, sale price, and cost basis, all in U.S. dollars. The resulting gain or loss from Form 8949 is then carried to Schedule D, Capital Gains and Losses.

To claim the Foreign Tax Credit, the taxpayer must file Form 1116, Foreign Tax Credit. On this form, the foreign income is categorized as passive income to calculate the allowable credit. The TDS certificate and other proof of Indian tax payments are used to substantiate the claim.

Additional Foreign Asset Reporting Requirements

U.S. citizens may also have separate obligations to report foreign financial assets, which are often triggered if sale proceeds are held in an Indian bank account. These are informational reports that do not impose tax, but penalties for non-compliance are severe.

One requirement is the Report of Foreign Bank and Financial Accounts (FBAR), filed with the Financial Crimes Enforcement Network (FinCEN) on Form 114. An FBAR is required if the total value of all foreign financial accounts exceeds $10,000 at any time during the year. This is a cumulative threshold across all accounts.

Another requirement is IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the annual tax return. The filing thresholds are higher than the FBAR’s and depend on filing status and residency. For a U.S. resident filing a single return, the threshold is met if specified foreign assets are valued at more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year. These thresholds are higher for those married filing jointly.