U.S. TAX GUIDE IN INDIA
What should US taxpayers understand before they sell an Indian property?
If you are a US citizen or Green Card holder, the Internal Revenue Service (IRS) generally requires you to report any profit or loss from selling real estate located in India.
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The fact that you already paid Capital Gains Tax (CGT) to Indian authorities does not remove your obligation to disclose the transaction on your US return. The United States taxes its citizens on worldwide income, so failing to include the sale could lead to penalties or an audit later.
At the same time, you may be able to claim a foreign tax credit to reduce or eliminate double taxation, which means the Indian taxes you pay can offset your US bill if you file the correct forms.
Does India’s inflation indexing affect US calculations?
India adjusts your property’s original purchase price for inflation, which lowers your Indian capital gains since the government uses a higher indexed cost. The United States does not apply that same inflation-based approach.
Instead, you take the actual historical purchase price—plus qualified improvements—and compare it to your sale proceeds.
This difference in cost basis calculations means you might face a higher capital gain in the US than in India, especially if a considerable amount of time has passed since you first bought the property.
In practice, you might pay modest capital gains tax in India (thanks to the index), only to discover that your US capital gains figure is substantially larger.
If the Indian tax on your gain is less than your calculated US tax, you could owe the remaining difference to the IRS.
If Indian taxes exceed what the US would normally charge, you may end up with little to no additional tax, but you still have to complete the necessary forms to claim the Foreign Tax Credit.
Should you claim the main home exclusion on a foreign residence?
You can exclude up to US$250,000 of profit (or US$500,000 if you file jointly and both spouses qualify) if the property served as your principal residence for at least two of the five years immediately before the sale.
This exclusion applies even if the home is in India, as long as you meet the ownership and occupancy requirements. If you do not satisfy the criteria, you will not be able to use this exclusion, leaving the full gain taxable under US law.
Many US expats who own foreign homes incorrectly assume the exclusion does not apply overseas, but the IRS does not limit the benefit to properties within the United States.
If you fail the time-in-home tests, however, you generally cannot claim that exception, and any gain you make will be subject to capital gains tax without the shelter that the main home exclusion provides.
Are upgrades and transaction costs important for your US gain?
You can generally add certain improvements to your cost basis and subtract selling fees from your overall profit. Legitimate items that often reduce your taxable gain include:
- Significant renovations or additions, such as a new room or a major remodel
- Structural improvements, like a roof replacement, upgraded electrical systems, or advanced plumbing work
- Major landscaping projects that increase the property’s value
- Window replacements, large-scale reflooring, or other substantial enhancements
- Realtor commissions, legal or notary fees, and administrative costs tied directly to the sale
By carefully documenting these expenses, you reduce the amount of gain you report to the IRS. Simple maintenance, such as painting or replacing a faulty fixture, typically does not count as an improvement unless it is part of a larger upgrade that genuinely increases the home’s overall value.
Do rental arrangements impact your US capital gains liability?
If you rented out the property and did not live in it as your primary residence for two out of the last five years, you generally lose access to the main home exclusion. The full gain becomes taxable in the US, which can be a major difference for people who planned on moving back into the property right before selling.
In addition, the Internal Revenue Code requires you to recapture depreciation if the home was used as a rental at any point.
Depreciation recapture adds back the total depreciation you claimed over time to the amount of gain you report. That leads to a higher taxable figure for your US capital gains.
Foreign tax credits can help offset some of these liabilities, and you can still deduct legitimate selling costs. The major factor is whether the property qualifies as your main residence during the relevant period. If it does not, you cannot rely on the exclusion, even if you previously lived there.
Is currency fluctuation a factor that can raise your tax in the US?
If exchange rates change between when you acquire the property and when you sell, you can face “phantom gains” that boost your US tax bill. For instance, if you borrowed rupees that were worth a certain dollar amount at purchase time, but the rupee’s value dropped by the time you repaid that loan, you might owe US tax on the difference.
The IRS treats that difference as a profit in some scenarios.
Unfortunately, if the currency shift goes against you, personal losses from currency movement generally are not deductible.
This situation can surprise people who assume exchange rate fluctuations are merely a financial detail that does not affect taxes.
In reality, the IRS can view those differences as something that changes your overall gain, especially if your liabilities in rupees became less costly in dollars.
