How Should a U.S. Citizen in Taiwan Report the Sale of Real Estate located in Taiwan for U.S. Tax Purposes?

U.S. citizens in Taiwan who sell real estate may face double taxation. Taiwan and the U.S. have different methods for calculating taxable gains on real estate transactions. How should U.S. taxpayers report their income?

Let’s examine this issue using the case of Ms. D, a dual-national U.S. citizen in Taiwan. Last year, Ms. D sold an investment property in Taiwan for NT$31 million. She originally purchased the property in 2001 for NT$20 million, and incurred NT$1 million in taxes and transaction fees (including deed tax, stamp duty, notary, and brokerage fees). At the time of sale, the government-assessed value of the house was NT$1 million, while the land value was NT$4 million.

Taiwan Tax Treatment of Property Sales

First, we must determine how Ms. D’s taxable income is calculated in Taiwan. Since she purchased the property before 2016, the older tax rules apply rather than the new capital gains tax rules. Under the old tax system, taxable income is based only on the increase in the value of the building, while land appreciation is not taxed. If the individual knows the separate purchase price for the land and the building, taxation is based on the building’s appreciation only. However, if the purchase and sale prices are only available as a lump sum, a proportional approach is used to determine the taxable portion of the gain.

In Ms. D’s case, because her purchase and sale prices were total amounts without a distinction between land and building, the tax calculation follows the proportional method. The proportion of the building's value to the total government-assessed value is calculated as follows:

Building Value / (Building Value + Land Value)

= 1M / (1M + 4M)

= 20%

Since Ms. D’s total capital gain was NT$10 million (NT$31M - NT$20M - NT$1M), her taxable income in Taiwan is calculated based on the building’s proportional value. This results in taxable income of NT$2 million (NT$10M × 20%).

U.S. Tax Treatment of Capital Gains

When reporting her real estate transaction to the IRS, Ms. D’s taxable income is determined differently. The U.S. considers both the land and the building’s appreciation as taxable capital gains. The first step is to determine whether this gain is classified as short-term or long-term.

Short-term capital gains apply to assets held for less than one year, while long-term capital gains apply to assets held for more than one year. Since Ms. D held the property for over a year, this qualifies as a long-term capital gain (LTCG). According to IRS tax brackets for 2024, the long-term capital gains tax rates are as follows:

Filing Status	0% Rate	15% Rate	20% Rate
Single	$47,025	$47,025 - $518,900	> $518,900
Married Filing Separately	$47,025	$47,025 - $291,850	> $291,850
Married Filing Jointly Qualifying Surviving Spouse	$94,050	$94,050 - $583,750	> $583,750
Head of Household	$63,000	$63,000 - $551,350	> $551,350

In contrast to Taiwan’s tax treatment, which only taxes the building's appreciation, the U.S. taxes the entire capital gain, including both land and building appreciation. Thus, Ms. D’s taxable gain in the U.S. is NT$10 million, rather than just NT$2 million.

Foreign Tax Credit (FTC) for U.S. Tax Purposes

While Ms. D must report the full NT$10 million gain in the U.S., she can claim a Foreign Tax Credit (FTC) to offset U.S. taxes for the Taiwanese taxes paid on this transaction. For example, if Ms. D paid NT$200,000 in Taiwanese taxes for this real estate sale, she may convert this amount into U.S. dollars using the exchange rate at the time of payment and claim this amount as a tax credit against her U.S. tax liability.

However, the full amount of foreign tax paid may not necessarily be eligible for a tax credit. The FTC calculation depends on factors such as the taxpayer’s total foreign income, deductions, and whether the foreign country has a tax treaty with the U.S.

Taxpayers with foreign real estate transactions should consult a professional tax advisor to ensure compliance with tax laws and maximize tax benefits.