U.S. Tax Implications of Selling Indian Real Estate

U.S. citizens and U.S. tax residents selling homes in India face tax on the same sale in two countries, with different rules on timing, rates, and what counts as cost. The most immediate impact: India treats capital gains based on how long you held the property, while the United States taxes your worldwide income and converts the entire transaction into U.S. dollars. That combination can trigger double tax without careful planning, even when you paid tax in India.

How each country treats the gain

• India bases tax on the holding period:
  • If owned < 24 months → short-term: taxed as ordinary income (slab rates).
  • If owned ≥ 24 months → long-term: taxed at 20% with indexation (indexation adjusts purchase price for inflation, reducing taxable gain).
• The U.S. taxes the gain in USD, using your original purchase price converted at the historical exchange rate as the cost basis. The U.S. does not allow indexation.

Key practical results:
– Exchange-rate moves can create extra U.S. taxable gain even if rupee gains seem modest.
– If the property was rented previously, depreciation recapture applies and can increase your U.S. taxable income.

Indian rules, deductions, and TDS

• TDS (Tax Deducted at Source): buyers in India must deduct TDS at sale and deposit it with authorities.
  • Typical TDS rates:
  • Long-term: 12.5% plus surcharge and cess
  • Short-term: 30% plus surcharge and cess
• Deductible seller costs (if documented): renovation costs, stamp duty, registration fees.
• Reinvestment reliefs:
  • Section 54 — reinvest in another residential property.
  • Section 54EC — invest in specified bonds.
• Sellers should obtain TDS certificates and keep invoices and proof of costs to reduce Indian taxable gains and to support U.S. claims for credit.

U.S. reporting, forms, and credits

• Report the sale on Form 1040, include the sale on Schedule D, and detail it on Form 8949.
• If you paid tax in India, you can reduce U.S. tax using the Foreign Tax Credit on Form 1116.
  • Official forms and instructions: Form 1040, Schedule D, Form 8949, Form 1116.
• U.S. long-term capital gains rates may apply if held > 1 year.
• Main-home exclusion: if it was your principal residence and you lived in it 2 of the last 5 years, you may qualify for $250,000 exclusion ($500,000 for some married couples).
  • Note: the exclusion does not cover depreciation recapture.
  • The U.S. does not recognize India’s Section 54 or 54EC reinvestment relief — so gains sheltered in India can still be taxable in the U.S.

Important: The Foreign Tax Credit offsets U.S. tax only up to the amount of foreign tax paid on the same income. If Indian tax is lower than the U.S. tax on that income, you will likely owe residual U.S. tax.

Common mismatch scenarios and risks

• India’s indexation lowers Indian tax, but the U.S. does not allow it — creating a higher U.S. taxable gain.
• TDS is deducted at the time of sale in India, but the Foreign Tax Credit is claimed when you file your U.S. return — you must keep TDS certificates and challans.
• Reinvestment relief in India may eliminate Indian tax but has no effect in the U.S.
• Currency fluctuations between purchase and sale dates can increase U.S. taxable gain.
• Depreciation recapture for prior rentals can generate unexpected U.S. tax even when India tax seems low or zero.

Key professional warnings (risks that lead to higher bills or IRS notices):
– Not reporting the sale in the U.S., even if proceeds never entered the U.S.
– Failing to calculate depreciation recapture when property was rented.
– Using incorrect exchange rates for purchase, renovations, or sale.
– Selling after becoming a U.S. tax resident (increasing U.S. exposure) vs. selling before residency.

Practical impact for families and cross-border taxpayers

• This affects H‑1B professionals, green card holders, U.S. citizens with family homes in India, and others with cross-border ties.
• Families often rely on sale proceeds for school costs, buying a U.S. home, or supporting relatives in India. TDS and timing of refunds can constrain cash flow.
• The IRS’s currency conversion rules may increase reported U.S. gains if the U.S. dollar weakened since purchase.
• Cross-border tax firms now commonly offer bundled services to calculate gains under both systems and prepare Form 8949, Schedule D, and Form 1116.

Practical steps to reduce stress and errors

1. Build a complete file:
   • Purchase deed, payment proofs, renovation invoices.
   • Stamp duty and registration receipts.
   • Loan statements and the final sale deed.
2. Secure TDS paperwork from the buyer and tax challans showing India tax payments.
3. If you used a Power of Attorney in India, keep notarized copies and any approvals.
4. Record exchange rates for each cash flow (purchase, renovation, sale) and note dates.
5. If rented previously, gather depreciation schedules used in earlier returns to compute recapture correctly.

When filing:
– Report the sale on Form 1040, list it on Schedule D, detail numbers on Form 8949, and claim foreign tax paid through Form 1116.
– The IRS instructions at the links above explain how to separate the gain, identify the country, and match the credit to the same category of income.

Timing, strategy, and cash-flow considerations

• Some consider delaying sale to reach India’s 24‑month threshold for long-term status (indexation benefit). That lowers India tax but does not change U.S. lack of indexation or create a U.S. exclusion unless you meet the main-home 2‑out‑of‑5 rule.
• Selling before becoming a U.S. tax resident may reduce U.S. exposure, but it’s a personal decision influenced by visa timelines, family needs, and market conditions.
• Plan for possible residual U.S. tax: TDS can hold funds until refunds are processed in India, and the U.S. return is due months later when the Foreign Tax Credit reduces the American bill.

Final takeaways and official guidance

• Because rules differ sharply — indexation and Section 54/54EC in India vs. depreciation recapture and currency conversion in the U.S. — do not assume a sale that looks tax-free in India is tax-free in the U.S.
• Careful recordkeeping, early advice, and accurate USD conversions matter.
• For official guidance on claiming credit for foreign taxes, see the IRS page for Form 1116: https://www.irs.gov/forms-pubs/about-form-1116

With organized documents, careful USD conversions, and the right forms — Form 1040, Schedule D, Form 8949, and Form 1116 — most sellers can meet their duties in both countries while keeping more of their hard-earned equity.