For a non-resident Indian who is selling a property in India but lives in the USA, understanding NRI taxation in the USA is essential. Although the property sale is occurring in India, the IRS still requires NRIs to report any capital gains or income earned from these sales on their United States tax returns.
Yes, the United States imposes tax on the worldwide income of its tax residents and citizens, regardless of where they live or where the income is generated. In this blog, we will discuss how to report these capital gains and stay compliant with US federal and state tax laws.
Key Takeaways
- As a US tax resident, you are required to report all your global income on your US tax return, including profit from the sale of property in India.
- As an NRI living in the United States, to avoid double taxation and claim tax credits for Indian taxes paid, you must file Form 1116 with your annual US income tax return Form 1040.
- All repatriation of sale proceeds transactions are governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA).
Key Compliance Requirements For NRIs Selling Property In India
For Non-Resident Indians (NRIs) selling property in India, there are a few compliance requirements you must meet to remain compliant with US federal and state tax laws.
Here is what you must do:
Disclosing income on IRS Form 1040
As a US tax resident, when you sell a property in India and earn any capital gains, it is essential to report this income on your annual US federal tax return (Form 1040). All sorts of income generated outside the United States, including capital gains from property sales, must be disclosed to the IRS.
Failing to do so might attract a penalty or even an audit, so it is better to take proactive measures and report all the income and associated expenses accurately.
Foreign Bank Account Reporting (FBAR) and Form 8938.
After selling the property, if you deposit the sale proceeds into any of your Indian bank accounts and the balance exceeds a certain threshold at any time during a financial year, then you are required to file the following forms with the United States government.
FBAR: The Foreign Bank Account Report (FBAR), also known as FinCEN Form 114, is filed with the Financial Crimes Enforcement Network (FinCEN). This form is filed to prevent tax evasion by requiring disclosure of foreign financial accounts held by a U.S. person.
For example, let us say that, as an NRI, you sold a property in India and deposited the sale proceeds into your Indian bank account. Upon depositing the total balance in your bank account that exceeds the threshold limit of $10,000 at any time in a financial year, you must file the FBAR.
Form 8938: This form is a part of the Foreign Account Tax Compliance Act (FATCA) requirements. This form is filed along with your annual US income tax return and submitted to the IRS, and not FinCEN.
Gift Reporting and Repatriation
If you are an NRI and repatriate funds exceeding the $100,000 threshold from the sale of a property, and those funds are treated as a gift, then it is essential to report them to the Internal Revenue Service using Form 3520.
However, there is no federal gift tax on amounts over this threshold, but some states may have their own gift tax. Hence, it is advisable to check the relevant state law to ensure compliance.
State-Level Income Reporting
Apart from federal tax reporting, you must also report your foreign income on your state tax returns. Some states, such as New York and California, have reporting obligations or income taxes on income from the sale of foregin property, regardless of where the transaction takes place.
How did the USA tax on Capital Gains From India
As a US tax resident (be it a citizen, green card holder, or resident alien), you are required to report all your global income on your US tax return, including profits from the sale of property in India.
Capital gains generated from the sale of property in India must be reported on your US tax return. To do so, you can use Schedule D (Form 1040) and Form 8949 to detail the transactions.
Please ensure that all amounts are reported in US Dollars by using the IRS-approved exchange rates for the applicable transaction dates.
Along with this, you may also need to report the sale under FBAR, that is, FinCEN Form 114, only if the indian bank account receives sale proceeds exceeding $10,000, or Form 8939 (FATCA) if the foreign assets exceed a set threshold.
Lastly, know that the DTAA India USA treaty offers considerable relief to American taxpayers selling property in India as an NRI. Ensure that the benefits of the tax treaty aren't automatic. You need to file certain forms to claim them. It is advisable to consult an NRI tax professional with expertise in India-US tax treaties and cross-border sales regulatory requirements.
Avoiding Double Taxation Through DTAA
A non-resident Indian (NRI) in the United States can claim a tax credit by filing out Form 1116 with their Form 1040, although the Internal Revenue Service has imposed a limit on it. Meaning that the foreign tax credit must align with the US tax liability in the same ratio as the NRI's foreign income is to total income.
In the United States, tax laws vary from state to state, and hence, the tax obligations of a non-resident Indian (NRI) will differ accordingly.
Please note that you have all the tax payment receipts and the agreement for verification.
Repatration of sale proceeds from India to the USA
After all the taxes are settled, you might as well transfer the savings back to your country of residence — the USA. Now, such repatriation transactions are governed by the Reserve Bank of India (RBI) under the FEMA (Foreign Exchange Management Act).
Non-resident Indians (NRIs) can repatriate up to $1 million per fiscal year from India, whether from sale proceeds or other income. The $1 million threshold applies on a per-person basis and requires adherence to specific compliance steps.
In case of property purchase with NRE/FCNR funds, the repatriation is limited to a maximum of 2 residential property sale proceeds.
Moreover, the properties must be acquired in accordance with the regulations governing foreign exchange at the time of purchase. Now, if the property is purchased using NRE account funds, the sale proceeds can be directly credited back to an NRE account for repatriation. In the other way around, they must first be deposited into an NRO account.
Documents Required For NRI Property Sale In India
For you to ensure a smooth transaction, collect and keep in order the following documents:
- The Sale deed and the title deed
- PAN Card (this is a non-negotiable document for property transactions).
- Passport and PIO/OCI card, if applicable.
- Encumbrance certificate and municipal approvals
- Power of Attorney (in case you cannot be present in India during the property sale process).
Paperwork required for Repatriation
- Tax computation and TDS certificates.
- Form 15CA (self-declaration of tax compliance) and Form 15CB (this is issued by a Chartered Accountant confirming the tax liability of the individual).
- Repatriation account Details, be it NRO/NRE.
Common Mistakes to Avoid
Non-resident Indians (NRIs), here are a few common mistakes to avoid:
Currency Conversion Errors: This is where the major mess happens. Please ensure that you use the correct IRS-approved exchange rates for the transaction date and year-end valuations. A small error here can impact your entire tax calculations.
Missing on FBAR: To keep everything smooth, make sure you do not overlook the FBAR requirement if your foreign bank account exceeded the $10,000 threshold at any point during the year.
Late Filing: Substantial penalties may be imposed if the relevant forms are not filed within the required timeframe, especially for international reporting forms such as Form 8939.
The Bottom Line
It involves a complicated interplay of US taxation and Indian taxation when you are selling a property in India as an NRI who has its tax obligations in the United States. Additionally, understanding how US tax laws apply to proceeds from selling a property in indian is complex.
Hence, to make the right decision, it is essential to have expert guidance to ensure compliance with both Indian and US tax regulations. At Savetxes, our experienced team is equipped to help NRIs with cross-border taxation. We can help you with:
- Accurate reporting of the foreign income to the Internal Revenue Service (IRS).
- Expert-backed consultation on Form FBAR and Form 8939 for foreign financial bank accounts.
- Ensuring tax compliance and offering tailored services to our internal team matters.
So, if you are looking for personalized advice on handling cross-border taxation? Contact Savetaxs today.
Note: This guide is for information purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult either a CA, CS, CPA or a professional tax expert from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
India
USA
Tax Consultancy Services
_1759750925.webp "What Is The Difference Between a 1099 and a W-2 Tax Forms")
_1754046271.webp "Advance Tax Planning For NRIs (Non-Resident Indians)")
