Michigan Tax on sale of property overseas

Forum|Forum|1 year ago
January 3, 2025
1 reply
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In 2024, I sold a residential property in India and got substantial Long Term Capital Gain. I had not resided in that property for over five years. However, I paid tax on capital gain to the Indian authorities.

IRS permits me to set off the tax paid in India (which, incidentally, is much higher than my tax rate here in USA.

Am I eligible to claim this credit in computing Michigan State Income Tax as well?

Thanks.

pk12_2

Employee

@abhishtu2 , Namaste ji.

(a) Under the US-India Tax treaty and utilizing the double taxation clause, US will give you credit for taxes paid to India. However, the amount allowable in the current tax year ( year in which the sale took place ), the best case scenario is for US tax on that same doubly taxed foreign source income is nil. But generally it is far less than that.

(b) Most states including MI do not recognize US-Other country tax treaties ( some states do or have their own with a neighbor foreign country -- e.g. NY with Canada )

(c) Also to note there is that your gain/ loss on alienation of foreign real-estate for US Tax purposes is based on US laws ( no indexing of basis as is done in India.). And it is the lesser of the two gains ( US and India ) that is doubly taxed -- generally US gain is higher.

Is there more I can do for you ?

Namaste ji

abhishtu2Author

Thank you for the clarification.

I am a US citizen residing in Michigan.

Actual tax I paid in India is much greater than what I believe the tax liability in USA. While USA does not have indexation, my gain in dollar terms, as well as tax rate here, would ensure that my liability would be lower than what I have already paid in India. In effect, I believe my federal payments would be zero.

If I understand you correctly, Michigan does not recognize India-USA DTAA and hence my entire LTCG (calculated in dollar terms) on sale of the property will be taxed at the flat rate of 4.25% with no credit for taxes paid to Indian authorities.

Thank you.

pk12_2

Employee

@abhishtu2 , generally agreeing with your post. I just want to make sure that " in dollar terms" is not the whole story. Yes for US Tax purposes you use the US dollar of the day ( i.e. published exchange rates effective on the day) od the transaction. However there are also rules for gain computation and what expenses are allowed to be included as offset ---that is why I used the term under US laws. Also the acquisition cost reckoning may be different whether you directly bought or acquired through gift or inheritance per the US laws. Then of course there is the basis adjustment based on laws of each country and/or facts and circumstances ( including how used / depreciation allowable / step-up etc. )

Further if the prop. was qualified as Long-Term ( per US laws ), the tax treatment would be capital gain tax rather than ordinary gain for both Federal and State taxes.

However, TurboTax would do all these things for you -- all you have to do is answer the questions posed.

Hope this heps.