taxes

How to calculate cost basis for Indian home

George SaenzDear Tax Talk,
I migrated to the U.S. in 2004 at age 50. Now I am a U.S. citizen. Prior to coming to the U.S., I used to live in my house in India that I built in 1984. I lived in this house for more than 15 years. Since my arrival here, my house is sometimes rented (when rented, I pay tax in the U.S.), sometimes not. Now I intend to sell this house in India.

My question is: To calculate capital gains, how do we calculate cost basis? Is the cost basis based on an inflation index, or the cost-and-sold prices to pay capital gain tax? In India, the inflation factor is taken into account to calculate cost basis. The indexation table is published by the Indian Revenue Service every year and is used to pay capital gains tax in India. Since the property is sold and the taxes are paid there, will the basis used to pay tax in India and certified by a chartered accountant there be used for Schedule D here? The property was purchased 20 years before coming to the U.S., and with no money earned in the U.S.

I will sincerely appreciate your advice.
-- Samtul

Dear Samtul,
Sorry to say, I don't have any good news for you. You've fallen into a tax trap, and unfortunately, at this point you don't have many options other than to pay the taxes, move back to the home for two years or hold on to the property until you die.

If you had sold the house when you first came to the U.S., you could have used the principal residence exclusion. This would have allowed you to exclude $250,000 in gain if you had lived in the home for two of the previous five years. While you didn't do this when you came here, if you decide to return to India for two years, you could requalify the house for the exclusion.

The U.S. tax law does not recognize inflation indexing for capital assets. This concept is used in many European countries and has been discussed here but has never become law. Instead, U.S. capital gains are taxed at preferential rates. Your gain is based on your original cost in 1984, not the value in 2004 when you migrated to the U.S. You'll have to adjust the gain that your Indian chartered accountant uses if it is indexed for inflation. The gain is reported on Schedule D.

Any Indian taxes that apply to the sale can be used as a credit against your U.S. taxes. Use Form 1116 to figure your foreign tax credit.

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