Hi, just joined the forum today, so thought i'd get my feet wet by putting up a post. Hopefully it's in the right section..! It's a USA / Australia question relating to treatment of Capital Gains. If I dispose of a property in the USA i'll be subject to Capital Gains Tax in the USA (both federal and state). When I come to complete my Australian tax returns, and I currently have Capital Losses carried forward from previous years, can I utilize my Australian Capital Losses against my USA Capital Gains Tax already paid? I'm totally unsure on this as it would be strange that the USA benefits from my tax payment, while Australia would have to give me a tax refund. Not sure if anyone's come across this scenario before....?
A bit fiddly since the AUD value of the CGT gain / loss WILL be very different from the USD values due to exchange rate variances in the ownership period. eg You buy a US property that costs $100K USD and sell for $100k USD then the gain may be zero in the USA. But if the exchange rate in 2009 was parity and now its .73cents then you may have a 35K gain in Australia. Was any withholding deducted in the USA ? Final income tax (no state tax ??) SOME of any Federal US tax may be creditable if its assessed but not if its only been withheld. Yes you may be able to use the C/fwd losses. It doesnt offset tax paid.....Also the way CGT discounts work may be a trap. Can you use your CGT losses to reduce US tax...No. I will argue that this issue is beyond most DIY taxpayers without serious mistakes
Thanks for the reply Paul. It's theoretical at the moment, but 1) I do have Capital Losses that 've been carrying forward in Oz now for a few years. 2) I have no short term plans to sell a property in the USA, but, and unless another crash occurs, i'd be hopeful of a Capital Gain when I do come to sell. I'm assuming if selling I would be subject to USA Withholding Tax until the final Capital Gains is calculated and paid, and I receive a credit / balance back. As you say, I assumed the USA wouldn't recognize my Oz CGT Losses, so I would have to pay the USA tax - no way out of that. I didn't think about the currency exchange in all of this either. I actually thought i'd just convert the Capital Gain from US$ to AUS$ at the time it eventuated, and the AUS$ amount (and US$ tax paid, also converted into AUS$) would just be popped onto my tax return. Then I was hoping that if I utilized my Oz Cap Gains Loss, it would result in a tax refund (taking account of tax already paid in the USA). Apologies if i'm rambling on a little here.
The foreign exchange matters will vastly impact on the gain or loss. The method is important to be correct and any tax credits would also need to use the correct exchange rate. I do 3-4 of these in the USA a year and they arent that complex BUT dates when you bought, did major works, sold etc are all important as they affect exchange rates used to work out the AUD value of the asset costbase and ist sale proceeds and selling costs in calcs for the $AUD value of profit etc. Then after the total gain is determined less the C/Fwd loss..I constantly told by taxpayers they made a loss - they make a profit or they get worried about a gain and its a loss. Easy to get all this wrong and over think it Dont count on a "tax refund" from a CGT event involving property. US withholding tax is NOT credited here. You must first lodge a US return to settle the final US tax due and credit the witholding tax (often excessive and so a US refund occurs) and only final actual Federal Tax paid is credited here. (ie no state tax if applicable) Start with the USA first.
Agree.... start with US tax accountant first. I would make sure you understand what you are up for first. If you are planning to sell US property and looking at a strategy of other markets in US you can use 1031 exchange and defer CGT in US
Thanks for the advice. I crunched some numbers, taking currency into account when I purchased, undertook improvements to the property & assume sell at today's x-rate. As I bought when the AUS-US$ was at parity i'm looking at a pretty big CG liability in Oz, even after offsetting Capital Losses and discounting by 50%. And taking into account I maybe cannot offset US State CG Tax, i'm looking at a pretty big liability between USA & Oz. When the time comes, getting the advice of a good US / Oz tax accountant will be money well spent.
And with a 1031, is the CGT calculated and then deferred, and when the 'new' property is sold any CGT from the new transaction is added to the deferred CGT, for an overall CGT liability..?
First tume I used this, not yet finalised, but yes deferred and added. I expect I wont be selling I have a large portfolio of properties in US, some will be keepers/never sell
I've no short term plan to sell, but just wanted to get a grip on my tax liability. Good job I did, as it appears to be a lot higher than I imagined..!
Yes Also IRS are a nightmare, you need excellent US accountant I had a dud when I started was not based in US and made some massive stuff ups Live and learn
How long have you owned this property ? If it was a isolated profit making transaction rather than a mere realisation of a CGT asset the final AU tax may not even be a CGT matter. (I'm speaking of AU tax laws- No idea if the USA have a similiat income v's CGT view of tax law) Just because its property being sold doesnt mean its a capital gain issue. The IRS and Australia are sharing loads of data now and I know the ATO have a project for US property sales data. Loads of aussies descended on the USA and the financial perils post GFC had profit making intentions and flipping etc. Little of which may be a CGT issue
I've had the property since 2013, under an LLC (2 members - me & the wife). Bought as an investment property and rented out since then. I was just thinking of the x-rate implications. When purchased there was an exchange from AUS$ to US$, but if sold and the 'gain' is retained in the US in US$'s, how is this treated in OZ? Do you still have to use the x-rate at date of sales contract for Oz tax purposes, even though no repatriation of the US$ into AUS$ has occurred?
Ok rented out - Thats less a concern. Exchange rates apply to the profit whether or not the (actual) $AUD exchange occurs. It applies as a means to value the transactions in AUD. You cant just enter USD into a AU tax return after all. I would use the exchange rate at the date it settles. Your choice not to repatriate the funds is then your issue.
Agreed, that makes sense. I was only thinking that could you determine the CG in 2 parts - 1) for the property sale - US$ sales price (adjusted) - US$ purchase price (adjusted) = CG in US$ - convert to AUS$ at time of sale. 2) X-rate when purchased AUS$ into US$ - but CG retained in US$ at sale = no current x-rate CG until converted back into AUS$ (or Capital loss for that matter). There is no gain or loss on the x-rate until converted back into AUS$..? Maybe i'm just over-thinking this..?
You are under thinking it. The sale in the USA is sale in Australia as far as the ATO are concerned. That the first CGT event. ATO exchange rates can be used. That also sets the base for the currency gain loss later. Then later if you repatriate proceeds back there could be another final gain based on the final realised AUD v's the rate used in the CGT calc. Two assets, two CGT events 1. CGT asset 2. FX gain / loss
