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Capital gains on gifted property sold in India must be reported as income on your U.S. tax return, although you might be able to avoid paying the taxes thanks to a tax treaty between the two countries. When completing your U.S. tax return, you must calculate your capital gains taxes just as you would if the property were located in the United States. But you can avoid some or all of the taxes by claiming a foreign tax credit equal to the amount of capital gains taxes you owe in India, in effect avoiding double taxation.
U.S. capital gains taxes generally apply to any profit you make on the sale of gifted property, even if the property is in India. If you owned the property for more than a year, you qualify for the long-term capital gains tax rate, which is typically lower than your regular tax rate. If you owned the property for a year or less, the capital gains are taxed at your regular tax rate. For 2012, the capital gains tax rates ranged from 0 percent to 15 percent, depending on your tax bracket. For 2013, the rates range from 0 percent to 20 percent.
Foreign Tax Credit
India has its own capital gains tax, so if you sell property there, you will owe taxes to the Indian government. To avoid double taxation, the Internal Revenue Service allows you to reduce your U.S. taxes by the amount of taxes you owe in India. In some instances you will still owe some taxes, as capital gains taxes are calculated differently in each country. To reduce your U.S. taxes, you must file Form 1116, "Foreign Tax Credit (Individual, Estate, or Trust)," with your U.S. tax return.
When reporting capital gains, you normally calculate your profit by subtracting your costs from the sale price. In the case of gift property, use the donor's costs as your own costs. Also use the donor's holding period as your own when determining if the gain was short term or long term. For example, if your parents gave you a house they owned for 10 years, and you sell it three months later, you count any profit as a long-term capital gain because of the donor's holding period.
When reporting the cost and sale price of the Indian property on your U.S. tax return, convert the amounts to dollars. Use the rate of exchange that was in effect at the time of each transaction. When you file your return, attach a detailed explanation of how you determined the exchange rate for each transaction.
Principal Residence Exclusion
U.S. tax laws allow you to exclude part of your capital gains on the sale of your principal residence, even if the home is in India. Individuals and couples can exclude up to $500,000 in capital gains from their income, and married individuals filing separately can exclude up to $250,000. To qualify as your principal residence, the home must have been your main home for at least two of the past five years, and you must have owned the home during those years.
Net Investment Tax
Although the foreign tax credit may reduce or eliminate the capital gains taxes on your income from India, you still might be subject to the 3.8 percent net investment tax that took effect in 2013. This tax generally applies to individuals with a modified adjusted gross income of at least $200,000 and couples with a MAGI of at least $250,000. When calculating your MAGI, you must take into account your capital gains on Indian property, even if you claimed the foreign tax credit.
Claiming income from foreign sources can be a complicated undertaking. Keep copies of any documents you use to support your claims for income and deductions, and be consistent in the way you calculate your foreign currency conversions. Consult a professional tax accountant or adviser if you are unsure how to proceed.
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