Capital Gains on Foreign Property

Dear Realtor,

One of the realtors who attended my continuing education classes recently wrote me an email asking for information for a client of hers who is a U.S. citizen who owns property in Colombia. He intends to sell the property in Colombia and is uncertain about the tax ramifications of the sale, both in Colombia and in the United States.

Fortunately, the tax consequences are not as severe as they would have been a few short years ago. In January, 2013, Colombia’s capital gains tax rate was reduced from 33% down to 10%. Assuming that this gentleman had held the property for at least two years, proceeds from the transaction would be subject to the Colombian capital gains tax rate of 10%. Proceeds of a sale of a property owned less than two years are considered as income for tax purposes this non-resident of Colombia would be taxed for this transaction at the income tax rate of 33%.

As you may know, all U.S. citizens must report their worldwide income. Thus, this gentleman would also owe U.S. taxes on any capital gains realized from the sale of the Colombian property. The 2016 U.S. tax rate for capital gains on the sale of property held at least one year is 15% for single filers with taxable income up to $415,050 ($466,950 for married filing jointly). For those with income above those levels, the rate is 20%.

Let’s say this gentleman bought the home in Colombia for $500,000 five years ago. Now, he is selling it for $1 million. The capital gains realized would be $500,000. Colombia would take $50,000 in capital gains tax, which represents 10% of the capital gains realized in the sale. When calculating the U.S. capital gains taxes, the gentleman would first be given a dollar for dollar tax credit for any Colombian taxes paid. If this man fell into the 20% bracket, his total U.S. capital gains tax liability for this sale would be $100,000, which represents 20%. He would be given a credit for the $50,000 already paid in Colombian taxes, and would only owe the remaining $50,000 in U.S. capital gains taxes.

One way to reduce U.S. tax liability in this case would be to make use of a 1031 Exchange. By purchasing another property with the capital gains of the sale of first property, one can “exchange” or defer the tax liability.

As always, please feel free to contact me if you have any questions on this or other legal issues.

Sincerely,

Don Gonzalez, Esq.