Do I have to pay tax on property sold overseas? This reader wants to use funds from the property sale to invest in real estate in California.
Q: I own a piece of real estate overseas and I’ve owned it for quite some time, even before I became a U.S. citizen. I would like to sell the property, bring back the money to the U.S. and invest in a home in California.
What would I need to do to bring the money here and invest it? How can I bring money to the U.S. so I don’t have a problem with the IRS?
How Do I Bring Money from a Property Sale to the U.S.?
A: Well, we’re not sure if your question relates to the mechanics of bringing money to the United States or if you’re trying to figure out if you can sell the property and avoid paying taxes on any profit you might have on the sale of the foreign property. We’ll address both issues.
On the mechanics of bringing money into the U.S., once you’ve sold the property, the money from the sale will end up in a bank (or some sort of financial services company) account overseas. You will need to wire transfer the money from that institution to your bank in the U.S.
You’ll need to contact your bank in the U.S. to get their information on how to receive funds from abroad. They will have someone that can guide you and provide you with the information you’ll need to give to the foreign financial institution.
You must make sure that the foreign financial institution has the correct information to get the money to your bank here in the United States. And, we have to emphasize that you need to be very careful that the people you are dealing with when it comes to the transfer of the funds are legitimate. There are so many scams out there designed to prey on people transferring money between banks in the U.S. and around the world. If you trust the wrong person, your cash could literally disappear in an instant.
How Long Will It Take to Transfer the Funds to the U.S.?
Depending on the amount of money you’re transferring, what country the money is coming from, and other factors, you might see the funds held up in transit while the government scrutinizes the transaction for money laundering purposes. This means that it’s possible that your funds could stay in transit while it is determined that the transaction is legitimate. You should discuss some of these logistical issues and possibilities with your bank here in the United States prior to the transfer so you are not surprised if it happens and know how to handle the situation.
Of course, the transfer of the funds shouldn’t be that big of a deal if you’re sending money from a country with a low incidence of money laundering and your name isn’t on any sort of list that might contain a name similar to yours that may be suspect.
Do I Have to Pay Tax on Property Sold Overseas?
As far as paying taxes on the sale, the IRS expects United States citizens to report all income, no matter how it is earned, from wherever they earn it in the world. We suspect that you will have to report the sale on your federal income tax return but can’t say what, if any, tax you might owe on the sale of the property. There are tax attorneys and attorneys who specialize in foreign income and you should contact one of them for more details on how to handle this in your tax return.
You mentioned that you want to reinvest the money in the United States, and when you say reinvest, we’re unsure whether you mean that the property you’re selling is an investment property and you want to buy another investment property in the U.S., or if you are casually using the word “invest” but intend to buy a personal residence.
Are There Any Tax Benefits to Investing Money from the Sale in U.S. Real Estate?
We doubt that you’d receive any federal income tax benefits from taking that investment outside of the United States and then investing that money in real estate here. Ordinarily, if you own investment property in the U.S., you can sell that property and then invest the money in another like-kind investment property and defer the payment of federal income taxes. These transactions are 1031 like-kind exchanges (named after the Internal Revenue Code Section 1031) and are sometimes referred to as Starker exchanges or like-kind exchanges. We’ve written about them extensively, and you can view that information at ThinkGlink.com.
Unfortunately, the tax provisions regulating 1031 exchanges do not include real estate properties outside of the United States. Even some U.S. territories don’t qualify for purposes of 1031 exchanges. Puerto Rico, for example, is one of those territories where you can’t sell or buy real estate and use the mechanisms of a 1031 exchange (although there are other tax benefits available to residents and business owners that may compensate).
This doesn’t mean that you can’t sell your real estate in another country and buy real estate in California. It just means that you might have federal income tax consequences to the proceeds. You’ll want the benefit of having a knowledgeable tax professional on your side as you move through this process. Good luck with your sale and your purchase.