Good evening, We own real estate (land) in India and sold one of them. There is Long Term Capital Gains (LTCG). I have a few questions:The tax system in India allows adjusting cost of acquisition/purchase price by indexation (adjusting by using cost inflation index [CII]) published by the government annually. You are also allowed to choose/opt for "without or no indexation." But, US doesn't allow indexation. My question is: for computing LTCG can I do indexation in India and consider the original cost of acquisition as allowed by the US tax system? Indexation helps to reduce LTCG in India. The tax system in India allows sellers to use original cost of acquisition/purchase price (which we have; for e.g., $100/sq ft) or fair market value (FMV; for e.g., $1,000 sq/ft) provided by a government approved valuator. FMV is widely used for computing LTCG in India because the government shifted CII base year from 1981 to 2001 for computing capital gains. My question is: can I use FMV in US as cost of acquisition? In most of the cases, using FMV along with indexation reduces LTCG in India.The US and India have Double Tax Avoidance Agreement (DTAA). So, we get credit for foreign taxes paid in India on our federal tax return but not on the state tax return. Thanks for your help. Dabu.

Solved

Selling International Real Estate and Capital Gains

Forum|Forum|4 years ago
November 28, 2021
3 replies
0 views

Good evening,

We own real estate (land) in India and sold one of them. There is Long Term Capital Gains (LTCG). I have a few questions:

The tax system in India allows adjusting cost of acquisition/purchase price by indexation (adjusting by using cost inflation index [CII]) published by the government annually. You are also allowed to choose/opt for "without or no indexation." But, US doesn't allow indexation. My question is: for computing LTCG can I do indexation in India and consider the original cost of acquisition as allowed by the US tax system? Indexation helps to reduce LTCG in India.
The tax system in India allows sellers to use original cost of acquisition/purchase price (which we have; for e.g., $100/sq ft) or fair market value (FMV; for e.g., $1,000 sq/ft) provided by a government approved valuator. FMV is widely used for computing LTCG in India because the government shifted CII base year from 1981 to 2001 for computing capital gains. My question is: can I use FMV in US as cost of acquisition? In most of the cases, using FMV along with indexation reduces LTCG in India.

The US and India have Double Tax Avoidance Agreement (DTAA). So, we get credit for foreign taxes paid in India on our federal tax return but not on the state tax return. Thanks for your help. Dabu.

Not A Product Question

Best answer by pk12_2

@DABU , yes you are correct in that India uses an indexing of the basis for purposes of computing gain of an asset

(a) In your particular case, it is best that you complete the Indian tax filing first and settle that before you do the US tax return. The reason for this is to avoid having to amend the US return if Indian IT dept. changes the tax liability --- I am aware that a 20% of the computed gain is the tax and is collected at source. Also there is the issue of Tax year difference between India ( Apr. 1st through 31st. March next calendar year ) and the USA ( Calendar year).

(b) For US purposes there is no indexation applied to the basis. Basis is defined as Acquisition cost plus cost of any improvements. The only time FMV is used as the cost basis is in case of acquisition by inheritance and it is the FMV at the time of death of the decedent or soon thereafter. I am assuming here that you acquired the property by purchase. Note that you will have to use the exchange rate at the time of each transaction. Thus if you bought the property in 1980, then you use the actual exchange rate ( from bank / published by RBI/ US Treasury ) at that time. Ditto for any improvements .

(c)For US purposes , the use of the asset while being held by you is germane --- so if you had some income from the asset during the period held, this should have been recognized on your US return and any allowable depreciation/ depletion ( not valid for land of course unless there is extraction of valuables like gas, oil, rocks, mining etc. ) reduces the basis , increases the gain and is subject to recapture ( taxed as ordinary income ).

(d) Also note that the gain that is treated as Capital gain will be taxed by the US under its rules/laws ( unless limited by tax treaty )

(e) Assuming you choose to take advantage of foreign tax credit, when filling out the form 1116, you need to be sure to answer the questions carefully because the foreign gain most likely will be different than the US gain and this creates a conundrum as to the definition of the foreign income/gain.

Is there more I can do for you ?

Namaste

pk

P

pk12_2Answer

Employee

@DABU , yes you are correct in that India uses an indexing of the basis for purposes of computing gain of an asset

(a) In your particular case, it is best that you complete the Indian tax filing first and settle that before you do the US tax return. The reason for this is to avoid having to amend the US return if Indian IT dept. changes the tax liability --- I am aware that a 20% of the computed gain is the tax and is collected at source. Also there is the issue of Tax year difference between India ( Apr. 1st through 31st. March next calendar year ) and the USA ( Calendar year).

(b) For US purposes there is no indexation applied to the basis. Basis is defined as Acquisition cost plus cost of any improvements. The only time FMV is used as the cost basis is in case of acquisition by inheritance and it is the FMV at the time of death of the decedent or soon thereafter. I am assuming here that you acquired the property by purchase. Note that you will have to use the exchange rate at the time of each transaction. Thus if you bought the property in 1980, then you use the actual exchange rate ( from bank / published by RBI/ US Treasury ) at that time. Ditto for any improvements .

(c)For US purposes , the use of the asset while being held by you is germane --- so if you had some income from the asset during the period held, this should have been recognized on your US return and any allowable depreciation/ depletion ( not valid for land of course unless there is extraction of valuables like gas, oil, rocks, mining etc. ) reduces the basis , increases the gain and is subject to recapture ( taxed as ordinary income ).

(d) Also note that the gain that is treated as Capital gain will be taxed by the US under its rules/laws ( unless limited by tax treaty )

(e) Assuming you choose to take advantage of foreign tax credit, when filling out the form 1116, you need to be sure to answer the questions carefully because the foreign gain most likely will be different than the US gain and this creates a conundrum as to the definition of the foreign income/gain.

Is there more I can do for you ?

Namaste

pk

O

Opus 17

Employee

If you are a US person and subject to US tax laws (i.e. a citizen, permanent resident with a green card, or resident alien) then your US tax is determined using only US tax laws, and this includes capital gains tax. You must determine your US capital gains under US law, even though you will determine your capital gains for India taxation using Indian laws. You can then claim a credit or deduction on your US tax return for foreign taxes paid on the same income.

Your cost basis will be your actual purchase price converted to US dollars using the exchange rate for that day (you can get historical rates online). You can adjust your basis for the cost of improvements (also at the appropriate exchange rate for when the improvements were paid for). Also be aware that if the home was used as a rental or in business, you must make an adjustment for depreciation you claimed or could have claimed under US tax law.

D

DABUAuthor

Good morning,

Thanks to pk and Opus for your comments and suggestions.

I have been using the US Treasury Reporting Rates. I am posting the links so that they could be useful to other members. I use the dollar to rupee year-end conversion rate for each year and mention in our tax return that the currency conversion is based on the US Treasury Reporting Rates.

You can find Treasury Reporting Rates of Exchange for the years 1963-2005 at the below link for Govinfo. These are in PDF format only. https://go.usa.gov/xm7a3
Treasury Reporting Rates of Exchange for the years 2001 to the present are available through the Bureau of the Fiscal Service. These datasets can be downloaded as CSV, JSON, or XML.

https://fiscaldata.treasury.gov/datasets/treasury-repor[product key removed]nge/treasury-reporting-rates-of-exchange

Is it Ok to add the following items to our cost of acquisition/purchase price?

1) attorney's fee for preparing the documentation 2) valuation fee 3) airfare for traveling to execute the transaction 4) broker commission 5) improvement charges (fencing to secure the property) 6) fee paid to the tax preparer 7) registration fee paid to the government at the time of purchase. I will have documentation to support each item.

After adding all the fees mentioned above, the cost of acquisition will be computed and will be used on our US tax return.

One request to pk: Is it possible to contact you outside the forum? It looks like you are an expert on the tax laws of India. This is because you clearly mention the tax rates on LTCG and taxation year in India in your reply. Please let me know. Sincerely, Dabu.

P

pk12_2

Employee

@DABU , as you can see there are quite a few "experts " in this forum for answers to issues that are of general interest. If you need more specific discussion, that may or may not of help to others, you are very welcome to PM ( the envelope icon on the top right). Note however, that while many/most of us volunteers , are either very well versed in the tax laws or are retired tax professionals, we are not acting in a professional capacity i.e. our advice/suggestions are ONLY that and should not relied on for purposes of asserting a position to the IRS. You do have to do your own reading ( we will of course help where to find the material ) and take up your own defense. Having said that, however, you are most welcome to contact me though PM --- just please do limit your PII ( Personally identifiable Information) -- because I have no idea as to whom is privy to the content ( not the general poster or other users) beyond you and I.

Namaste

pk