Living abroad, sold former US home at loss

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john77
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Living abroad, sold former US home at loss

Post by john77 » Tue Mar 08, 2016 5:01 am

I live abroad and recently sold my former primary residence from the States which we were holding onto and renting to tenants for 6 years (at a loss) up until we sold it at an even bigger loss in January. We took about a $40,000 loss on the property compared to the purchase price when we bought it in 2008 prior to our move overseas in 2010. I'm curious when doing our taxes, is there anything in my favor here? that would see me get any kind of refund/break from govt, and considering property taxes on the property had cost me about $4,000/year. Would I be able to at least take any of that and put into an Roth or something? I'm thinking no to all and that I just take the royal screw and move on, but figured someone here at a basic level would know.

I should mentioned that I'm married with 2 kids and our income is about $100,000k combined/year, meaning I only pay income tax to my current resident country, not Uncle Sam.

Thanks in advance.

canga
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Re: Living abroad, sold former US home at loss

Post by canga » Tue Mar 08, 2016 7:17 am

Interesting question. Expats (or anyone for that matter) can only contribute to a Roth IRA if you have earned income. Because you state that you are excluding your earned income, then you cannot contribute to a Roth IRA.

In your situation you may be able to do "tax gain harvesting" (I made that term up but have done this while an expat). In other words, you can sell appreciated stocks at a gain, I bonds, etc, and still not owe any taxes. Because this is "tax gain harvesting" and not tax loss harvesting, then you can immediately buy back the stocks at a stepped up basis. It's kind of like having a Roth IRA in a taxable account.

What country do you live in? Do you have access to a tax preparer?

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in_reality
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Re: Living abroad, sold former US home at loss

Post by in_reality » Tue Mar 08, 2016 9:28 am

canga wrote: In your situation you may be able to do "tax gain harvesting" (I made that term up but have done this while an expat). In other words, you can sell appreciated stocks at a gain, I bonds, etc, and still not owe any taxes. Because this is "tax gain harvesting" and not tax loss harvesting, then you can immediately buy back the stocks at a stepped up basis. It's kind of like having a Roth IRA in a taxable account.

What country do you live in? Do you have access to a tax preparer?
Um, I don't think that "tax gain harvesting" works if you are in the 25% bracket which $100,000 combined/year will put you.

You can exclude your income as an expat and not pay taxes on it, but the income is still used when calculating your tax rate. That's what the IRS told me anyway when I didn't do it right some years ago and what TurboTax shows me now.

You could be eligible for an IRA if you go over the exclusion + housing deduction. Un-excluded money gets taxes and is earned income. You have to go over the limit though and can't exclude only part by choice.

If you are in a high tax rate country, you can claim a credit for taxes paid and not exclude your income. This will make you ROTH eligible I believe. You local rate has to be higher than the US though for it to work.

Carefreeap
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Re: Living abroad, sold former US home at loss

Post by Carefreeap » Tue Mar 08, 2016 10:06 am

Do you currently file a US tax return?

Are you planning on returning to the US?

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HueyLD
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Re: Living abroad, sold former US home at loss

Post by HueyLD » Tue Mar 08, 2016 10:29 am

If you are in a high tax rate country, you can claim a credit for taxes paid and not exclude your income. This will make you ROTH eligible I believe. You local rate has to be higher than the US though for it to work.
Be careful with that.

The IRS rules:
Once you choose to exclude your foreign earned income or housing amount, that choice remains in effect for that year and all future years unless you revoke it. You can revoke your choice for any tax year. However, if you revoke your choice for a tax year, you cannot claim the exclusion again for your next 5 tax years without the approval of the IRS. For more information on revoking the exclusion, see chapter 4 of Publication 54.

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in_reality
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Re: Living abroad, sold former US home at loss

Post by in_reality » Tue Mar 08, 2016 10:32 am

HueyLD wrote:
If you are in a high tax rate country, you can claim a credit for taxes paid and not exclude your income. This will make you ROTH eligible I believe. You local rate has to be higher than the US though for it to work.
Be careful with that.

The IRS rules:
Once you choose to exclude your foreign earned income or housing amount, that choice remains in effect for that year and all future years unless you revoke it. You can revoke your choice for any tax year. However, if you revoke your choice for a tax year, you cannot claim the exclusion again for your next 5 tax years without the approval of the IRS. For more information on revoking the exclusion, see chapter 4 of Publication 54.
And also be careful that the foreign tax credit is actually advantageous. You really need to do the return and not just compare tax brackets and judge by that.

CFM300
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Re: Living abroad, sold former US home at loss

Post by CFM300 » Tue Mar 08, 2016 11:09 am

in_reality wrote:
canga wrote: In your situation you may be able to do "tax gain harvesting" (I made that term up but have done this while an expat). In other words, you can sell appreciated stocks at a gain, I bonds, etc, and still not owe any taxes.
Um, I don't think that "tax gain harvesting" works if you are in the 25% bracket which $100,000 combined/year will put you.
I think canga is suggesting that the OP use the $40,000 capital loss from the sale of his house to offset $40,000 worth of capital gains on his stocks or mutual funds in his taxable account.

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jimb_fromATL
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Re: Living abroad, sold former US home at loss

Post by jimb_fromATL » Tue Mar 08, 2016 12:29 pm

Bear in mind that you can't claim a loss on a home that drops in value while it is your residence. If you bought it at or near the top of the bubble in 2008 and put it into rental service in 2010, chances are the loss was while you were living in it. And since many homes have recovered in value in many areas, chances are probably more likely that you have a gain in value over the last 6 years rather than a loss to report.

For gain or loss calculations, the cost basis is the lesser of your adjusted basis or the fair market value at the time it was put into rental service. As a greatly simplified example:
  • If you paid $343,000 for it in 2008 and it dropped 20% by 2010 while you were living in it, then your cost basis at the time you converted it to a rental would be $274,400.

    If it recovered in value around only 2.% per year, it would be worth $302,960 now … which is $40,040 less than you paid for it, but a gain of $28,560 over its value at the time it was put into rental service.
Don't forget that the depreciation allowance and tax on the depreciation recapture, too.

Presumably you were already getting tax breaks by deducting expenses including the mortgage interest, taxes, insurance, maintenance, repairs, management fees, etc., plus the depreciation allowance ... and probably paying no income taxes on the rental income even though you've been increasing your net worth in the form of reduced debt on the mortgage plus any appreciation/recovery in value on the home ... while somebody else was paying most of the costs for you.

jimb

Two Headed Mule
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Re: Living abroad, sold former US home at loss

Post by Two Headed Mule » Tue Mar 08, 2016 1:02 pm

jimb_fromATL wrote: For gain or loss calculations, the cost basis is the lesser of your adjusted basis or the fair market value at the time it was put into rental service. As a greatly simplified example:
  • If you paid $343,000 for it in 2008 and it dropped 20% by 2010 while you were living in it, then your cost basis at the time you converted it to a rental would be $274,400.

    If it recovered in value around only 2.% per year, it would be worth $302,960 now … which is $40,040 less than you paid for it, but a gain of $28,560 over its value at the time it was put into rental service.
The "lower of basis or FMV at time of conversion" rule only applies for purposes of calculating depreciation and determining any loss on subsequent sale. To calculate the gain, the original basis (adjusted for depreciation and capital improvements) is used. In the simple example above (ignoring depreciation) there is no loss using the lower basis and no gain using the higher (original) basis, so there is no gain or loss on sale.

Mule

canga
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Re: Living abroad, sold former US home at loss

Post by canga » Sun Mar 13, 2016 8:14 am

CFM300 wrote:
in_reality wrote:
canga wrote: In your situation you may be able to do "tax gain harvesting" (I made that term up but have done this while an expat). In other words, you can sell appreciated stocks at a gain, I bonds, etc, and still not owe any taxes.
Um, I don't think that "tax gain harvesting" works if you are in the 25% bracket which $100,000 combined/year will put you.
I think canga is suggesting that the OP use the $40,000 capital loss from the sale of his house to offset $40,000 worth of capital gains on his stocks or mutual funds in his taxable account.
This is correct. Being an expat is full of situations where you can avoid paying taxes on earned income as well as paying taxes for capital gains.

Foreign earned income exlusion
Foreign housing exclusion
Standard deduction
Personal exemption

Add to this any tax loss harvesting opportunities, and it's very likely that one can avoid paying taxes for capital gains while working abroad.

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in_reality
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Re: Living abroad, sold former US home at loss

Post by in_reality » Sun Mar 13, 2016 8:49 am

canga wrote:
CFM300 wrote:
in_reality wrote:
canga wrote: In your situation you may be able to do "tax gain harvesting" (I made that term up but have done this while an expat). In other words, you can sell appreciated stocks at a gain, I bonds, etc, and still not owe any taxes.
Um, I don't think that "tax gain harvesting" works if you are in the 25% bracket which $100,000 combined/year will put you.
I think canga is suggesting that the OP use the $40,000 capital loss from the sale of his house to offset $40,000 worth of capital gains on his stocks or mutual funds in his taxable account.
This is correct. Being an expat is full of situations where you can avoid paying taxes on earned income as well as paying taxes for capital gains.

Foreign earned income exlusion
Foreign housing exclusion
Standard deduction
Personal exemption

Add to this any tax loss harvesting opportunities, and it's very likely that one can avoid paying taxes for capital gains while working abroad.
Married filing jointly, you'd still need to get under $75,000 after your Standard deduction and Personal exemption

The standard deduction is $12,600 and personal exemption what $4,000 X number of people.

So at $100,000 of income with four people, you'd have about $3,600 in capital gains you could harvest. That's assuming that $100k is total and there isn't additional investment income -- dividends or capital gains coming in.

My point was money excluded in the Foreign earned income exclusion and Foreign housing exclusion are still included towards the tax bracket calculation.

So it's $100,000 - ($12,600 + $16,000) as far as figuring out where you are for capital gains. That puts you at $71,400 or $3,600 below the bracket where capital gains starts. [rough estimates here]

There is no advantage in terms of capital gains as an expat. Your foreign income is counted as income and moves you into the taxable gains brackets the exact same way as regular at-home Americans are. The only difference is that you haven't paid uncle Sam tax on that income you excluded, you have paid your country of residence.

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