http://www.ird.govt.nz/property/property-selling/selling-property.html
Key concept for tax purposes
1. Bought as primary residence in 2000. Lived in the property
2. Posted overseas on business and maintained the property as New Zealand residence.
3. Stayed overseas and bought a family home in the USA after getting permanent residency in the USA
4. Selling the property after more than 15 years, as I want to buy another property in the USA.
Assumptions
1. No capital gains tax as property was owned for more than 15 years
2. USA tax must be paid on the income in the year the profit is realized.
3. Classed as a second home in New Zealand.
Key questions
1. Even if I do not have to pay capital gains taxes in New Zealand, If I bring the money back to the USA, do I have to pay capital gains taxes in the USA calculated at the rate in the USA.
2. How do I calculate the capital gains taxes in the USA?
Calculating the capital gains tax
1. Calculate your “basis” in the capital asset. Your basis is the purchase price adjusted for improvements, depreciation, and other adjustment items. Think of basis as an adjusted purchase price.
2. Subtracting the basis from the sales proceeds to determine the tax owed.
Purchase Price (approx figures)
$525,000 Sale Price
minus $199,999 Purchase Price
minus $140,000 renovation and legal costs due to faulty construction
minus $ other upgrades
minus $depreciation costs
Taxable Profit
$250,000
Capital Gains Tax at 15% = $37,500 NZD or approx $27,000 USD
First, you will only be taxed only on the profits. You will not be taxed on the amount you paid for the house (your basis in the asset). For example: You paid $200,000 for the house. You sold it for $250,000. You made a $50,000 profit. Only the $50,000 is taxable income.
Second, the accountant is plain wrong that you earned the money before you came to the US if profits are involved. Profits are recognized in the year that you sell an asset. For example: You bought your house in 2005 for $200,000. The value of your house fluctuated between then and now - from $150,000 to $500,000. You sell the house in 2012 for $250,000. You recognize $50,000 profits in 2012.
Third, a green card holder is treated like a US citizen. Income earned worldwide are taxable in the US. It the responsibility for the privilege of living here.
I don't know enough about the US/Germany tax treaty, but I do about tax treaties in general. The reason for tax treaties is to encourage foreign investment and eliminate both country taxing the same income. Generally, there are exemptions for securities, bank interests, etc. because you can choose banks anywhere and you can buy securities on foreign exchanges. Because you have the option to invest your money anywhere, these types of assets are tax in only one country. However, if you want to invest in German real estate, you don't have an option to buy German real estate in another country. Real estate is unique. And because it is unique, it will be taxed by the country where the real estate is located.
If you pay capital gains taxes on the profit income in Germany, you will get a US tax credit.
It doesn't matter if you don't bring the money to the US. You realized the income when you were a green card holder, so you must report it as income on your tax return. If you fail to report it as income, you are risking a giant tax bill and fines for failing to report your income.
Selling property in New Zealand
If you're selling a residential property and one of your intentions when you bought the property was to sell it, then you'll have tax to pay on any profit you make from its resale.
When selling a residential property you will need to provide information to your property lawyer or conveyancer. This may include:
- your IRD number
- your taxpayer identification number (another country’s equivalent of an IRD number), if you have one
- a completed Residential land withholding tax declaration (IR1101), and
- details of your relationship to the buyer if they are considered to be "immediate family", which in this case means a person:
- who is your:
- spouse, civil union partner, or de facto partner
- parent, sister, or brother, or
- child, or a child's spouse or partner
- who is the parent, child, sister, or brother of your spouse, civil union partner, or de facto partner.
The tax you pay depends on four things
- Your intent when you purchased. (primary home - always intended to be primary residence)
- Your history of buying and selling. (zero - only property ever owned)
- Whether you're in or associated with the property industry. No
- Whether you buy and sell a property within two years.No
It's your intention when buying a property that matters
Nearly everyone buying a property will sell it at some stage. Most people will hope that their property will gain in value, and we know that an increase in value is common. However, this alone isn't enough for any profits to be taxed. In most cases you don't have to pay tax on the eventual sale of your family home. If you bought a property as a long-term rental, then you may not have to pay tax on the sale either.
However, when a property has been bought with the firm intention of resale you'll have to pay tax on any profit from the sale. The intention to sell does not need to be the main reason for buying the property - it could be one of a number of reasons for buying.
Your history of buying and selling counts
If you have a pattern of buying and selling property, then you may be a property dealer and may have to pay tax when you sell property, even on your family home. If you're unsure whether you're a property dealer, you should seek advice from your tax advisor.
If you're a dealer, developer or builder - NA
You are liable to pay tax on the profit from any properties you sell, which were bought as part of your property or building business.
Selling within 10 years - NA
If you sell a property you will be liable for tax if the sale is within 10 years of purchase and you were a property dealer or developer at the time you bought the property. This is regardless of whether the purchase was part of your property business or not.
If you sell a property you will be liable for tax if the sale is within 10 years of building work being completed on the property, and you were a builder or in the building business at the time you bought the property. This is regardless of whether the purchase was part of your building business or not.
If you're associated with a dealer, developer or builder - NA
If you're associated with someone in the property industry - you're an "associated person". This means you may have to pay tax on all or some of your property transactions, even if you're not personally a property dealer, developer or builder.
These transactions include tax on the sale of a property if you had an association with:
- a property dealer or developer when you brought the property
- a builder when significant improvements started on a property.
The associated person rules changed for land acquired on or after 6 October 2009, and the definition of what's meant by some associations has widened. For more information about associated persons and property transactions, read these guides:
You buy and sell a property within two years - NA
If you buy and sell a residential property within two years, you'll pay tax on the income you earn from the sale, unless you're selling your family (main) home or another exclusion applies. This is regardless of your intention at the time of the purchase. A withholding tax may also be deducted at the time of sale.
The bright-line test - NA
The bright-line test only applies to residential properties bought and sold on or after 1 October 2015.
Generally the two-year period starts on the date the property transfer is registered with Land Information New Zealand (LINZ). If the property is in another country, it's the date the transfer was registered under that country's laws.
Different dates apply if you:
- sell the property before your purchase is registered with LINZ (for example a sale or purchase "off the plan")
- subdivide a section.
Exclusions to the bright-line test
There are three exclusions to the bright-line test:
- It's your family/main home.
- You inherited the property.
- You're the executor or administrator of a deceased estate.
A property transferred to you under a relationship break-up isn't excluded from the bright-line test.
If you receive a property as part of a relationship settlement agreement, you won't need to pay income tax on the property when it's transferred to you.
However, if you go on to sell this property within two years of its original purchase date, the bright-line test will apply.
Deciding if the main home exclusion applies
The person selling a property decides if it's their main home. You'll do that based on the exclusion criteria.
You can only use the exclusion twice over any two-year period.
The main home exclusion does not apply if you show a regular pattern of buying and selling residential property.
The property sells at a loss
Under the bright-line test, if a residential property is sold at a loss, the loss will be "ring-fenced". This means you can subtract the "ring-fenced" loss from income you earn on a future property sale and pay less tax.
You can only offset the loss against income from a property sale. For example, you can't offset the loss against salary, wage or rental income.
When your circumstances change
Sometimes things change, but it's your intention when buying a property that matters.
You decide to sell your rental property or portfolio
There may be a number of reasons you decide to sell a rental property sooner than you thought. Or you may decide it's time to sell your entire portfolio of rental properties.
In both cases it doesn't mean you'll have to pay tax on any profit from the sales. It comes back to your original intentions when you bought the properties, if you have a regular pattern of buying a selling or you bought and sold within two years.
Everyone's case is different.
Common misconception
If I only sell one property or hold a property for 10 years before I sell, I won't have to pay tax.
What the law says: Wrong on both counts. It always comes back to your intention when you bought the property. If one of your intentions was resale, you'll pay tax on any profit you make when you sell. It's a popular misconception that holding a property for 10 years means you avoid paying tax.
Related products, services and links
QB 15/02: Income tax – major development or division – what is “significant expenditure” for section CB 13 purpose
Capital Gains in USA
The benefits of owning real estate are many: leverage, appreciation, cash flow and tax write-offs. Although prices can and do sometimes go down, historical long-term appreciation rates have compared favorably with stock gains. So if you can hang on for a lengthy period of investment, you may reap substantial gains when you sell.
Capital Gains
When you sell rental property, profits, or capital gains, and losses are categorized as either short-term or long-term. Short-term profits are taxed at the same rate as ordinary income. Long-term capital gains are taxed at between 5 and 15 percent, depending on your tax bracket. Neither short-term nor long-term capital gains are subject to the social security tax. The maximum long-term capital gains rate is typically lower than the ordinary tax rate for most people selling real estate. To qualify for the long-term rate, you have to hold real estate for at least one year.
Depreciation Recapture
When you own rental real estate you claim depreciation on the building you own and all capital improvements you have made. Depreciation is a tax deduction based on the cost of an asset and its useful life. You divide a building's cost by its useful life term as defined by the IRS, which is 27.5 years for a residential rental building, to get the amount of depreciation you can deduct from the building's income each year for the full useful life term. When you sell the building, you must claim all of the depreciation used over the full term you owned the building; it is taxed at a special depreciation recapture rate of 25 percent.
Deferred Exchange
A deferred exchange, also called a 1031 exchange (after the IRS code section that allows it), permits the seller of rental real estate to take the profits from a sale and invest them in another rental property without having to pay taxes. This is a federal tax provision that is also honored by all but two states (Georgia and Mississippi). It is referred to as a deferred exchange because taxes will have to be paid when the second property is sold. However, because there are no limits on the number of 1031 exchanges you are allowed to participate in, you could continually roll over profits into new properties and never pay taxes. You must use an exchange facilitator or other impartial third party to hold the proceeds between sales, and the transactions must conform to strict timelines.
Calculating the capital gains tax
When calculating your capital gain, you must first calculate your “basis” in the capital asset before subtracting it from the sales proceeds to determine the tax owed. Your basis is the purchase price adjusted for improvements, depreciation, and other adjustment items. Think of basis as an adjusted purchase price.
