As an Australian expat living in the USA you may have to contend with the impact of taxes on property that you own in Australia or in the USA.
The types of taxes relating to property that you may need to consider include:
- Income taxes
- Capital gains tax (CGT)
- Local taxes such as land tax in Australia or Property Taxes in the USA
- If you inherit property in the USA you may also be subject to inheritance taxes
Since your country of residence will have an impact on how you are taxed for income and capital gains purposes, this article assumes you are a USA tax resident. You can read more about US tax residency in our article ‘Managing Dual Tax Residency as an Expat‘.
Australian Property Taxes
Once you cease to be an Australian resident for tax purposes the taxes you pay on income generated from Australian owned property changes, in potentially significant ways.
Income Generated From Your Property
As a non-resident for Australian tax purposes, any income generated from Australian real property will need to be declared and taxed in your annual tax return on a non-resident basis. This means there is no tax free threshold and your income is taxed at foreign tax rates.
When you lodge your Australian tax return, any tax paid to the Australian Taxation Office (ATO), can be claimed as a tax credit in your USA tax return.
This will apply to any property you retain in Australia as an investment property, or any new property you invest in that is located within Australia.
Changes To The Way CGT Applies When You Move To The USA
Your Main Residence
As an Australian tax resident your main residence is exempt from capital gains tax (CGT). However, when you move overseas and become a non-resident, this exemption ceases to apply, except in limited circumstances.
If you have already moved to the US, but intend to return to Australia at some point, your main residence exemption will again be accessible, but only on a pro-rata basis, as long as you are once again an Australian resident at the time you sell your former main residence.
CGT Discount
Australian residents are ordinarily given a 50% CGT discount on assets that are sold after 12 months of ownership. This discount is not available to foreign residents for assets acquired after 8 May 2012. For any property that you acquired after this date you will only be able to utilise the 50% CGT discount on a pro-rata basis for any period that you were an Australian resident.
Note that the discount cannot be applied for any period of ownership where you are or were a non-resident. This means that even if you return to Australia as an Australian tax resident, you will be unable to apply the CGT discount for your time as a non-resident.
Land Taxes
As land tax is applied on a state-by-state basis, the rules and calculations for this tax will vary depending on the location of your property.
It is important to note that some states apply a foreign surcharge on the taxable value of land. This means that your land tax costs may be more expensive while you are a non-resident of Australia.
Transfer of Property (Stamp Duty)
When you purchase property in Australia you are subject to stamp duty on the value of the property. Stamp duty is applicable on a state level which means that the assessment criteria and rate of calculation, including any exemptions or reductions, varies between states.
Declaring Australian Sourced Property Income
You will need to declare any income you earn from your Australian investment property on your US tax return. You can also claim a credit for any tax paid on the income to the ATO.
USA Property Taxes
The USA has a lengthier range of taxes and a generally more complex tax system. This is because taxes may be applied on a Local government level, as well as State and Federal levels. With the USA being a much larger country than Australia, taxes can be quite complicated.
Income Taxes
If you hold investment property in the USA you will be taxed on the income generated from renting the property. Unlike Australia, income is taxed on both a Federal and a State level in the USA. This means you are required to lodge both a Federal and a State tax return, unless you are in a state that does not apply income tax.
Capital Gains Tax
The US has a Capital Gains Tax regime that is similar to Australia’s Capital Gains Tax regime.
There are exemptions for primary residences, provided certain conditions are met, and long-term capital gains, defined as assets that are owned for more than a year, are taxed at a preferential rate.
Whereas Australia gives a flat 50% discount after 12 months of ownership, the US applies a progressive, preferential rate of tax which depends on your total taxable income. The rate of tax that is applied to long-term capital gains may be 0%, 15% or 20%.
Local Property Taxes
Property Taxes are imposed by Local governments, which means they vary widely depending on the location of your property. The Local governments that impose these taxes includes counties, cities, and school districts.
The closest comparison in Australia would be land tax. However, while land tax in Australia is assessed on just the value of the land, Property Tax in the USA is assessed on the overall value of the home, including both the land and the property structure. Also, while Australians typically find that their main residence is exempt from Land Tax, US property owners are usually subject to Property Tax, even on their main residence.
The assessed value of your property will determine how much property tax you are required to pay, and this assessment is periodically reviewed, including when there are significant changes made to the property. Assessment is based on a unit known as “a mill”, which is the equivalent of one-thousandth of a dollar.
Some jurisdictions offer exemptions or deductions that can reduce your property tax liability. Exemptions and reductions may cover factors such as the property being your primary residence, or personal factors, such as age, disability, or veteran’s status.
For states that have a “homestead exemption”, Property Taxes are reduced on your main residence. Most states allow between $5,000 and $500,000 of your main residence to be exempt from Property Tax, with larger exemptions for married couples or joint owners. Conversely, some states do not have this exemption at all.
These taxes are ordinarily due annually or semi-annually, depending on the jurisdiction. Penalties and interest can apply for late payments, so it is important to be aware of your local property tax requirements.
Transfer Taxes (Conveyance or Deed Taxes)
When you transfer property between one person or entity, to another, you will also be assessed for transfer taxes, otherwise known as conveyance or deed taxes. Since transfer taxes are administered by the Local government, who pays these taxes, and how much they are, varies significantly between States, and sometimes even between counties within a State. Transfer taxes may be payable by the seller, the buyer, or both.
Estate and Inheritance Taxes
Unlike Australia, most States of the USA have a specific estate and inheritance tax.
Estate taxes are levied on the total value of a deceased person’s estate, before it is distributed to the beneficiaries of the estate. Conversely, inheritance taxes are imposed on the heirs who take ownership of the assets.
These taxes are also applied on a State level, which means the rules and tax rates can vary significantly, and not all States impose them.
Australian Tax Resident
Note that there may be different outcomes if you only are living in the USA on a short-term basis and remain an Australian tax resident instead of becoming a US resident.
It would also mean that you are required to lodge a US tax return as a non-resident. You would then lodge an Australian tax return as a resident, declaring worldwide income, including the foreign income and foreign tax credits from the US.
Understand Your Property Tax Obligations
Taxes on Property, from Property Taxes imposed on ongoing ownership of property, through to taxes on rental income from investment property and CGT, can be extensive. When you are contending with holding property overseas and required to deal with international taxes, it can be even more complex.
Since tax legislation can vary significantly, even between States within the same country, and laws are often adjusted and updated, it is important that you always seek the most up to date tax advice for your situation.