Hello,

I am US Citizen and in the process of selling some property in India and unfortunately am only now realizing that re-investing the proceeds there may be the best avenue for me. Reinvesting will allow me to avoid capital gains taxes in India. Am I eligible for tax deferral in the US via a 1031 Exchange (will be moving from land to a rental property, both within India)? If so, what do I do about the qualified intermediary? I couldn't seem to find any that specialize in India, and there are heavy restrictions regarding repatriating the funds (in Rupees) so I don't even know how I am to allow the intermediary to hang on to them until the purchase of my next property within the required time frame (45 days for declaration and 180 days for completion). The sale is almost complete (sale agreement signed and waiting for bank check to be ready so can proceed to transfer the deed). Am I already too late? Thanks for your help in advance.

Closing on the real estate transaction prior to signing the exchange documents, receiving the check or having someone hold it for you after the closing negates the opportunity to use the 1031 exchange. Yes, it is possible to exchange real property in India for real property in India and defer the federal capital gains. As a Qualified Intermediary (QI), Atlas 1031 Exchange is located in the United States, I would need to work with an English speaking attorney or escrow officer responsible for the closing along with a local bank you know and trust. The funds can be held in India given they are held by the QI on your behalf. What I need to create the exchange documents is the name of the Seller and Buyer, date of sales contract, legal description of property, name and email of escrow officer and banking contact. I would create, and email them to the closing attorney or escrow officer in India. You can contact me at [email protected].

The exchange must be set up prior to or the day of closing.

Thanks for the reply. Maybe I first need to clarify the need for completing a 1031 exchange and hopefully you can also help me here. I will owe capital gains taxes in India (20%). My understand is, if I pay these taxes because of a double taxation treaty between India and the US I won't owe the cap taxes in the US (15%). However, I have options also available in India to receive tax exemptions by investing the cap gains in residential real estate or government bonds. If I do so and receive the exemption, do I owe the cap gains taxes in the US? Or will they recognize that I owed tax but received an exemption? Or will I have to do the 1031 exchange in this case (assuming I choose real estate over the gov't bonds).

Thanks again.

I agree with your view of paying the capital gains tax in India and subsequent application to US obligation per the double taxation treaty.

Unfortunately, I am not familiar with the effect of the exemptions mentioned. It would appear that purchasing residential real estate to hold as rental property would benefit from the Indian tax exemption and deferral of United States (U.S.) capital gain by initiating a 1031 exchange.

I suggest determining the recognized gain or tax to determine whether paying the tax or deferring in a 1031 exchange makes sense. U.S. capital gains are scheduled to increase to 20% beginning January 1, 2013. Implying that the U.S. rate is historically low providing justification to paying the tax.

Many thanks for your prompt reply. I am in the process of determining exact liabilities to see what is the best route. I will be in touch regarding the 1031 exchange if that is the best solution.

Thanks again.

Hi TaxQuestion3. I am in the same position as you i.e. a US citizen selling real estate in India. Can you tell me how you finally handled the situation?

Hello,

I can suggest a CPA familiar with real estate transactions in India. Feel free to contact me [email protected] for the referral. The CPA can respond to your specific tax oriented questions. I can accommodate the exchange in India.

Hi tq0001,

Because I had already initiated the sale procedures I was unable to do the 1031 exchange. And it didn't really matter anyway, as I chose to re-invest the proceeds in commercial property as opposed to residential property for a number of reasons, and therefore I was unable to get an exemption in India. Since I have to pay capital gains taxes in India, I should be getting an exemption here in the US due to the tax treaty.

I hope this helps.

Thanks TQ. I ended up in the same position i.e. could not use the 1031 Exchange. Are you not using the expenses you incurred in the maintenance & upkeep of the property to lower your taxes? From what I understand these are allowable expenses.

For the taxes in India? I forget the reason now, but a chartered accountant I used in India said I couldn't use expenses to reduce my gain. But since it was just a piece of undeveloped land those expenses were quite minimal anyway, so I didn't investigate it further. It could very well be different for an established property.

Since I will be claiming the Indian taxes paid over here and since the capital gains tax rate in India is for now higher than the US, my understanding is that I will not be able to use the expenses paid on my US return (since the foreign taxes paid is greater than the actual US capital gain tax liability).

1. In India long term capital gain tax rate is 20%. For cost you take indexed cost of acquisition and improvements. Read Short Term and Long Term Capital Gains
2. You must also report this long term capital gain on your US tax return on schedule D (Form 1040). You will also file Form 1116 to claim credit for income tax paid in India.

Our joint property was sold in India by the power of attorney (PO) , appointed by my husband. We were not informed of the events, so some money was depostied in our NRO account . We were told that we need not pay the taxes till the final agreement is registered. This process was delayed for several years.as the builder stop paying. Now the full payment is recevied and we are prepared to pay the taxes in India. Now that the deed.

Our US tax advisor is saying we should have paid the taxes as soon as we recevied our payments. We did not know this and did not know how to do the indexation of the partial payments at various inntervals.

How do we rectify this?

Amend the returns in the years you received the cash, and request waiver of penalties.

Would you be kind enough to share the name of the CPA familiar with real estate transactions in India, since I am looking to do a 1031 exchange in the next year or so. Thanks.

Sorry, even if I had such a referral (which I do not), I cannot post names on the forum (against the rules).