Understanding U.S. Tax Implications for Australian Expats Selling Property in Australia
When Australian expats move to the United States and later sell property held in Australia, they may face complex tax obligations. The U.S. tax system requires residents to report and pay taxes on worldwide income, including capital gains from foreign real estate sales. This can result in a significant tax burden, particularly when the property has appreciated substantially over time. Understanding how the U.S. calculates taxable gains and how Australian tax laws interact with U.S. obligations is essential for successful financial planning.
Case Study: U.S. tax implications for Australian expats selling property
The Johnson Family’s Property Sale
To illustrate the potential impact of U.S. tax rules, consider the case of the Johnson family. In 2000, they purchased a luxury property in Sydney’s eastern suburbs for AUD 1 million. Over the years, the area’s real estate market boomed and by 2025, the property was worth AUD 10 million. The Johnsons relocated to the U.S. in 2015 for career opportunities, becoming U.S. tax residents. In 2025, they decided to sell their Sydney home and realised a gain of AUD 9 million.
U.S. Tax Basis and Capital Gains Calculation
For U.S. tax purposes, the property’s basis is its original purchase price, regardless of when the owners became U.S. residents. This means that, despite moving to the U.S. in 2015, the Johnsons’ basis remains AUD 1 million. When they sell the property for AUD 10 million, their taxable capital gain is AUD 9 million. While this may seem unfair, the IRS does not account for appreciation occurring before U.S. residency when calculating taxable gains. This would fall under standard US tax code law Topic no. 703, Basis of assets (i.e. there’s no special excerpt for non-residents/residents).
The Johnson family may be eligible for certain U.S. tax exemptions on the sale of the property, such as the $250,000/$500,000 home sale tax exclusion. If they meet residency and ownership requirements, they could exclude up to $500,000 of gain from taxation if filing jointly. However, given the significant appreciation, this exemption would provide only limited relief.
Australian Capital Gains Tax Considerations
As of December 12, 2019, the Main Residence Exemption was abolished. This had previously allowed Australians to exempt gains from their main residence. Non-residents can no longer claim this exemption, even if they once lived in the property as an Australian tax resident. The Johnsons, having sold the property as non-tax residents are no longer entitled to the MRE, even for the time the previously lived in it from 2000.
Exceptions to this rule are rare and generally limited to extreme circumstances. For example, death in the immediate family or court orders related to relationship breakdowns. Typically, the MRE is available only if the individual returns to Australia and resumes tax residency.
Further, as of May 9, 2012, the 50% CGT Discount was abolished. This had allowed Australians to reduce their capital gains by half. As a non-resident, you can only apply the discount proportionately. This means you can only claim the discount for the period you held the property before May 9, 2012, and for any period after this date you were a tax resident. As such, the Johnsons’ will be able to claim some CGT relief. [Read article]
Currency Exchange and Tax Reporting
One of the most overlooked aspects of selling foreign property as a U.S. tax resident is the impact of currency exchange rates. The IRS requires that all transactions be reported in U.S. dollars. This means:
- The property’s purchase price in 2000 must be converted to USD using the exchange rate at that time.
- The sale proceeds in 2025 must also be converted using the prevailing exchange rate at the time of sale.
Given fluctuations in AUD/USD exchange rates, this conversion can significantly impact the reported capital gain. If the Australian dollar depreciates against the U.S. dollar over time, the gain in U.S. dollars could be larger than it appears in AUD terms, increasing the taxable amount under U.S. law.
Foreign Tax Credits and Double Taxation Relief
One of the critical aspects of dealing with dual taxation is the ability to claim Foreign Tax Credits (FTC) in the U.S. for taxes paid to Australia. The U.S. generally allows its taxpayers to offset foreign taxes paid against their U.S. tax liability to prevent double taxation. However, the process is not always straightforward.
Since the Australian tax rate on capital gains for non-residents can exceed U.S. capital gains tax rates, the Johnsons might be able to offset some their U.S. tax liability with the taxes paid in Australia. However, if the U.S. taxes due are higher than the Australian tax paid, they will need to cover the difference.
Strategic Tax Planning Considerations
Given the complexity and potential tax burden, there are several steps that Australian expats can take to minimise their liabilities:
- Timing the Sale – If the Johnsons had sold their property while still Australian residents, they could have benefited from the MRE and paid no tax at all.
- Structuring Ownership – Holding property through a trust or entity structure might offer some tax advantages, depending on individual circumstances.
- Residency Planning – If the Johnsons planned to return to Australia, deferring the sale until they re-established Australian tax residency could have led to more favourable tax treatment.
- Foreign Tax Credit – Consulting with cross-border tax professionals to ensure the proper application of FTCs can help mitigate tax liabilities.
Compliance and Reporting Obligations
Beyond the tax calculations, U.S. expats selling foreign property must also comply with several reporting requirements, including:
- IRS Form 1040 Schedule D – To report capital gains from the sale.
- IRS Form 1116 – To claim foreign tax credits.
- FBAR (FinCEN Form 114) and Form 8938 – If the proceeds from the sale result in foreign financial accounts exceeding reporting thresholds.
Failure to meet reporting obligations can result in penalties and increased scrutiny from tax authorities.
Summary: U.S. Tax Implications for Australian Expats Selling Property
For Australian expats living in the U.S., selling a property in Australia can trigger significant tax obligations in both countries. Understanding how U.S. and Australian tax laws interact, planning for foreign tax credits, and strategically timing the sale can help reduce tax liabilities. Given the intricacy, consulting with a cross-border expert is highly recommended to face these challenges and ensure compliance with all legal requirements.
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