U.S. TAX GUIDE IN BRAZIL
Do I need to report capital gains to the IRS when selling a property in Brazil?
Yes, you must report any capital gains to the IRS if you sell a property in Brazil.
The US requires its citizens and green card holders to report worldwide income, which includes gains from selling property abroad.
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What if I lived in the property and didn’t rent it out?
If the property was your primary residence, meaning you lived there for at least two out of the five years before selling, you might be eligible for a capital gains exclusion.
If you’re filing as married filing separately, you can exclude up to US$250,000 of the gain. If you file jointly, the exclusion increases to US$500,000.
Do I have to pay capital gains tax on the entire profit?
No, you only pay US capital gains tax on the amount that exceeds the exclusion.
So, if your gain from the sale is within the exclusion limits, you won’t owe any US tax on that gain. However, if your gain exceeds the exclusion—say, US$300,000 on a single filer’s return—you would owe tax on the US$50,000 that exceeds the US$250,000 exclusion.
What if I rented out the property before selling it?
This gets more complicated. When the property has been rented out, the IRS considers the sale more like selling an investment. In this case, you’ll need to account for the recapture of depreciation—essentially, you’ll need to pay back the tax benefits you received from depreciation deductions during the time the property was rented.
Why does the IRS treat the sale differently if it was rented out?
The IRS views the rental period as generating business income, which means that when you sell, they want to ensure that all the income and expenses associated with the property are properly accounted for.
This includes paying taxes on any depreciation recapture, which is the amount of depreciation you claimed as an expense during the rental period that now needs to be “recaptured” and taxed when you sell.
In short, selling a property in Brazil can lead to different tax implications depending on whether the property was your primary residence or rented out as an investment.
What is depreciation recapture, and how does it affect your tax bill?
Depreciation recapture is something you need to be aware of if you’ve been renting out or using your property in Brazil for business and have claimed depreciation on it.
Depreciation is a tax deduction that lets you write off the cost of wear and tear on the property over time.
However, when you sell the property, the IRS requires you to pay taxes on the depreciation you claimed. This is called depreciation recapture.
Here’s what this means for you:
- Depreciation Deductions: If you claimed depreciation on your Brazilian property, it reduced your taxable income while you owned the property.
- Recapture Tax: When you sell the property, the IRS taxes the amount you claimed as depreciation. This amount is taxed at a higher rate than regular capital gains—up to 25%. For example, if you claimed US$50,000 in depreciation on a rental property, that US$50,000 will be taxed at the depreciation recapture rate when you sell.
What happens if you don’t report foreign property sales to the IRS?
Here’s what could happen if you don’t report the sale:
- Penalties and Interest: If the IRS finds out you didn’t report the sale, you could face large fines and interest charges. These penalties can add up quickly, especially if the IRS thinks you deliberately avoided reporting the sale.
- Losing Tax Benefits: By not reporting the sale, you might miss out on tax benefits like the Foreign Tax Credit, which can reduce your US taxes by taking into account the taxes you paid in Brazil. You might also lose the chance to offset gains with any losses you’ve had.
- Higher Risk of an Audit: Not reporting foreign income increases your chances of being audited by the IRS. An audit can be stressful and time-consuming, and if the IRS finds that you underreported your income, they might impose even more penalties.
- Possible Criminal Charges: In extreme cases, if the IRS believes you were intentionally hiding income, you could face criminal charges, which could include heavy fines or even jail time.
Can you offset capital gains from a Brazilian property with losses in the US?
Yes, you can.
If you made a profit from selling a property in Brazil, you can offset that gain with any losses from other investments in the US. This can help reduce the amount of tax you owe.
If you sell a property in Brazil and make a profit, that’s considered a capital gain. If you also have losses from other investments, like selling stocks or another property in the US at a loss, you can use those losses to offset your gains.
Additionally, if your losses are bigger than your gains, you can carry over the extra losses to future years. You can use these losses to offset future gains or reduce your taxable income by up to US$3,000 (US$1,500 if married filing separately) per year.
Remember, when reporting the sale of your Brazilian property, you’ll need to convert the sale price and purchase price to US dollars using the correct exchange rate. This affects how much gain or loss you report.
