Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: My company is temporarily relocating me to Shanghai for two years. I'm thinking about buying a home there, but does it make sense to do so if I'm going to sell the property when I move back?
Tax-wise, it’s not necessarily a good idea to buy a home in Shanghai for a two-year period unless you believe home prices there will rise significantly, said Michael W. Galligan, partner in the Trusts & Estates Department of Phillips Nizer LLP in New York City.
Buying a home in Shanghai will mean that you will need to file tax returns in both the U.S. and China, Mr. Galligan said. Therefore, tax compliance becomes considerably more complicated and costly.
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Also, you may not get full credit for the China tax when you pay your U.S. taxes, he pointed out. And finally, it’ll be incumbent upon you to make sure you understand all the tax aspects of buying in China and retain competent Chinese tax advisers and tax preparers.
Then, when you are ready to sell your home in Shanghai, you will likely be subject to both capital gains tax in China (currently 20%) and in the U.S. (as much as 20%), Mr. Galligan said.
In the U.S., you may also have to pay the 3.8% Medicare tax, also known as the Net Investment Income Tax (NIIT), and any state income tax on the profit from the sale of the home. NIIT kicks in when modified adjusted gross income is $200,000 or more for single taxpayers or $250,000 for married couples filing jointly.
State income tax applies while you were in China if you were a resident of a U.S. state that has a state income tax, or you sell the home during a year that you establish residence in such a state, Mr. Galligan explained.
It’s worth noting, he said, that if you opt not to go to China and instead buy a house in the U.S. and then selling it after the same two-year period, the taxes would be similar to what you’d pay on a home in Shanghai if you’d bought and relocated there.
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But that shouldn’t rule out buying the property in Shanghai. If real estate prices there are expected to rise over the next two years, a home purchase may be "an opportunity to earn some U.S. tax-free income," said Jenny C. Lin, principal of Lin Tax Law in Walnut Creek, California.
Just as taxpayers in the United States can keep as much as $250,000 tax free in profits from the sale of their principal residence stateside through the home sale gain exclusion, so, too, can Americans who sell their homes abroad. "There is no requirement that the principal residence be located in the United States," Ms. Lin said.
To claim this exclusion, the taxpayer must have owned and used the property as their principal residence for an aggregate of two years or more, she said.
A married couple filing a joint tax return doesn’t have to pay taxes on the first $500,000 from the sale of their home if they used the property as their principal residence and if neither spouse had used this exclusion within two years, Ms. Lin said.
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If the home is sold before the two-year mark, because of health reasons or certain other unforeseen circumstances, partial exclusions may apply, she noted.
"You may not necessarily receive a credit or offset of $1 U.S. tax for every $1 dollar equivalent of tax that you pay to China," Mr. Galligan said. So before buying, have your U.S. accountant or tax preparer run a draft calculation to verify whether your U.S. credit would fully offset the Chinese tax, and be sure to consult with a professional in China.
"The rules and requirements are complex," Ms. Lin said, emphasizing the importance of working with a tax return preparer knowledgeable about income and information reporting involving cross-border situations. "U.S. taxpayers are required to report income on a worldwide basis and may also be required to report certain foreign assets or transactions."
Therefore, buying and selling a home in Shanghai "is a lot of trouble to go through unless you think the market for residential properties [there] is going to significantly appreciate over the two-year period and that the likely profit makes all these steps worthwhile," Mr. Galligan said.
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