home sale in India, IRS tax exemption for USC?

[nand]

If a house in India is my primary residence, am I entitled to a capital gains tax examption up to 500K (MFJ) assuming I would qualify for one if it were in the US?

[nand]

This is what the schedule D instructions says, it does not explicitly mentions that the main home needs to be in the US. So does this mean that if I buy a home in India, live in for 2 yrs or more, 3 yrs to avoid Indian LTCG, and gain less than 250/500K (mfj), I can go tax free in both India and US? I interpret it as I need not report it on tax return.

Desi, Bobus, other experts please comment...

Sale of Your Home





If you sold or exchanged your main home, do not report it on your tax return unless your gain is more than your exclusion amount. Your exclusion amount is zero if:

You acquired your home in a like-kind exchange in which all or part of the gain was not recognized, and

You sold or exchanged the home during the 5-year period beginning on the date you acquired it.

Generally, if you meet the two following tests, you can exclude up to $250,000 of gain. If both you and your spouse meet these tests and you file a joint return, you can exclude up to $500,000 of gain (but only one spouse needs to meet the ownership requirement in Test 1).
Test 1. You owned and used the home as your main home for 2 years or more during the 5-year period ending on the date you sold or exchanged your home.

Test 2. You have not sold or exchanged another main home during the 2-year period ending on the date of the sale or exchange of your home.

Even if you do not meet one or both of the above two tests, you still can claim an exclusion if you sold or exchanged the home because of a change in place of employment, health, or certain unforeseen circumstances. In this case, the maximum amount of gain you can exclude is reduced.
You can choose to have the 5-year test period for ownership and use in Test 1 above suspended during any period you or your spouse serve on qualified official extended duty as a member of the uniformed services or Foreign Service of the United States. This means you may be able to meet Test 1 even if, because of your service, you did not actually use the home as your main home for at least the required 2 years during the 5-year period ending on the date of sale.
See Pub. 523 for details, including how to report any taxable gain if:

You (or your spouse if married) used any part of the home for business or rental purposes after May 6, 1997, or

Your gain is more than your exclusion amount.

[Desi]

Nand,

To my knowledge the cap gains from foreign primary residence are treated no differently than cap gains from US primary residence.

One key thing to remember for those that are US residents for tax purposes but living outside US, should make sure that they file the treasury form (form 90, i don't remember the exact number) every year for foreign bank accounts, etc.

[nand]

Desi

Thx. So IF I am eligible for a tax exemption upto 250/500K(single/MFJ) then the same applies to my primary home in India. That is how I read it as well.

The AAP implication of this for USC R2I's is that buying a bigger (more expensive - which I hope correlates to bigger/better:emsmile:) home is beneficial because:

1. If you hold for 3 years and it is your primary residence you can escape taxes on gains on it BOTH in India and in US
2. primary residence in India is exempt from wealth tax (1% of wealth exceeding 15 lacs which can add up)
3. Considering Indian MF's are prohibitive to USC ROR's due to PFIC, not many diversified investment vehicles remain in India that can consistently keep pace/beat inflation. So far real estate has easily beat inflation in most cities and in some cases far out paced it. However, it is far from a diversified invesment on the other hand (after all you are tying a good part of your income in one place!)
4. These days you dont have to try too hard to spend 1-2 crores on a home in India:emcry: :emwink:

I would even argue paying down in cash as much as possible. I can see the downsides of this strategy, and have not done a detailed analysis. Comments welcome.

[Desi]

Nand,

Yes, within the constraints of primary home and time limits of residence in 2 of past five years, the cap gains are tax exempt with those limits from US taxes.

Property of any type is one way to avoid PFIC issue for someone who is US resident for tax purposes but physically residing and investing in India.

As with any investment, the investor has to asses the amount of investment in property with relevance to returns, risk (ie overall AAP).
Adjusting AAP to a higher mix of real estate because of PFIC issues makes sense.

[prasannavs]

Yes, i believe so. Read this in some wall street journal article. Search WSJ, you might find it.