January 09, 2025

Understanding How Indian Property Capital Gains Are Taxed in the USA

Selling property in India as a Non-Resident Indian (NRI) involves specific tax implications in the United States. While the transaction itself happens abroad, the proceeds and gains from the sale are subject to US tax regulations. This blog focuses on how to report these gains and comply with federal and state tax laws.

Key Compliance Requirements for NRIs

1. Disclosing Income on IRS Form 1040

All income, including capital gains from foreign property sales, must be reported on your annual federal tax return (Form 1040).
Ensure accurate disclosure of the income to avoid penalties or audits.

2. Foreign Bank Account Reporting (FBAR) and Form 8938
If the sale proceeds are deposited into Indian bank accounts and the balance exceeds specific thresholds, you must file:

FBAR (Foreign Bank and Financial Accounts Report) with FinCEN.
Form 8938 (Statement of Specified Foreign Financial Assets) as part of your federal tax return.

3. Proportionate Tax Credits for Indian Taxes Paid

Taxes paid in India on the sale of property by NRI can be claimed proportionately (not fully) in the USA by filing Form 1116 with your Form 1040.
Keep documentation, such as tax payment receipts and the sale agreement, for verification.

4. Repatriation and Gift Reporting

If the repatriated amount exceeds $100,000 and is treated as a gift, it must be reported to the IRS using Form 3520.
While there is no federal tax on gifts or inheritances, some states may have specific tax requirements. It is advisable to verify the laws in your state.

5. State-Level Income Reporting

Income from the sale must also be reported on state tax returns. Some states may impose additional taxes or reporting obligations, even if the income is from overseas.

The Importance of Accurate Record-Keeping

Maintaining detailed records is crucial for compliance. Ensure that you document:

The property sale agreement and proof of ownership.
The purchase price, cost of improvements, and sale proceeds.
Currency conversion rates used for reporting to the IRS.
Receipts of Indian taxes paid.

Expert Guidance for NRIs

Navigating the complexities of NRI taxation and cross-border taxation requires expertise.. At Dinesh Aarjav & Associates, we specialize in assisting NRIs with: