Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: Under the new tax law, are taxes paid to foreign countries deductible against U.S. income tax in the following cases? 1. annual property taxes 2. capital gains tax on sale of foreign realty 3. taxes on acquisition of foreign property?
A: Annual property taxes on an overseas property are no longer deductible under the Tax Cuts and Jobs Act of 2017, according to Mark Stone, a partner at New York City-based firm Holland & Knight. These changes will be in effect for the period between Dec. 31, 2017 and Jan. 1, 2026.
Those who rent out a foreign property for more than 14 days a year are eligible for a tax deduction, according to Steven E. Plotnick, an attorney at McLaughlin & Stern in New York. The new tax law caps the amount of taxes U.S. citizens can deduct from their income taxes at $10,000, however, and these deductions would fall into that basket.
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But for many people paying taxes on an income-producing property abroad and also paying income taxes in the U.S., it’s likely better to apply for a tax credit, according to William L. Abrams of the New York law firm Abrams Garfinkel Margolis Bergson. These are tax credits in the U.S. for income taxes paid to foreign countries, and these have not changed under the new tax law.
As to capital gains taxes that might arise in a foreign country from the sale of the home, they would, in general, be subject to the overall $10,000 limit ($5,000 in the case of a married person filing separate) for all state, local and foreign income taxes paid for the year, Mr. Stone said. For many, he added, that amount may already be met from state income taxes alone, so that the foreign capital gains taxes could not be deducted in any amount.
Nonetheless, the new law did not change the ability of a U.S. person to claim a foreign tax credit for capital gains taxes paid to a foreign country, in lieu of a deduction. "The foreign tax credit, if available, is generally worth more than a comparable deduction," Mr. Stone said, adding that "claiming a tax credit requires analysis by a tax professional."
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Finally, the third type of tax, typically known as a local transfer tax on the purchase and sale of real estate and imposed at a fixed percentage rate of home value, is unaffected by the new law. Such taxes are not deductible but are added to the tax basis in the home for purposes of determining the amount of gain on sale, according to Mr. Stone.
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