Selling real estate in India while living in the U.S. triggers tax obligations under both Indian and U.S. tax laws. As a U.S. tax resident, you're required to report worldwide income, including capital gains from foreign property sales. Here's a simplified yet comprehensive guide to help you understand how U.S.-based NRIs are taxed when selling property in India.

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Part 1: U.S. Capital Gains Tax on Sale of Indian Property

How U.S. Tax Works for Foreign Property Sales

If you're a U.S. resident (citizen or green card holder), the IRS taxes you on your global income. This includes capital gains from selling property in India.

Capital Gains Calculation

U.S. capital gains tax is based on your adjusted cost basis:

• Original purchase price

• Plus: capital improvements

• Plus: transaction/legal costs

• Minus: depreciation claimed (if rented)

• All values must be converted to USD using appropriate exchange rates at each event (purchase, improvement, sale)

Short-Term vs. Long-Term Gains

• Short-term capital gains (property held for ≤1 year): taxed at ordinary income tax rates (10%–37%)

• Long-term capital gains (held >1 year): taxed at preferential rates (0%, 15%, or 20%) depending on income

Example:

• Purchase price: ₹1.6 crore @ ₹80/USD = $200,000

• Improvements: $20,000

• Depreciation claimed: $5,000

• Adjusted cost basis: $215,000

• Sale price: ₹2.8 crore @ ₹70/USD = $400,000

• Capital gain: $400,000 - $215,000 = $185,000

This $185,000 must be reported as capital gain in your U.S. tax return.

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Part 2: U.S. Tax Reporting Requirements

When you sell property in India, the following IRS forms may apply:

• Form 8949 – Report the sale of the asset

• Schedule D – Summarize capital gains and losses

• Form 1116 – Claim Foreign Tax Credit for taxes paid in India

• FBAR (FinCEN Form 114) – Report foreign bank accounts if combined balance exceeds $10,000

• FATCA (Form 8938) – Report foreign assets if thresholds are met ($50,000+ for individuals)

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Part 3: Ways to Reduce U.S. Capital Gains Tax

1. Primary Residence Exclusion

If the Indian property was your main home for at least 2 out of the last 5 years, you may exclude:

• Up to $250,000 (single filer), or

• $500,000 (married filing jointly) from taxable gain

2. Foreign Tax Credit

You can claim a credit for capital gains tax paid in India to avoid double taxation. File Form 1116 for this credit.

3. 1031 Like-Kind Exchange (Foreign-to-Foreign Only)

If you reinvest the proceeds into another investment property in India or abroad (not in the U.S.), you may defer capital gains tax. This only applies to foreign-to-foreign exchanges.

4. Long-Term Holding

Holding the property for more than one year allows you to benefit from lower long-term capital gains rates.

5. Use of Foreign Trusts or Entities

Owning the property through a trust or company may offer estate or tax planning benefits, but involves complex compliance with forms like 5471, 8865, or 3520.

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Part 4: Does FIRPTA Apply to Sale of Indian Property?

No. FIRPTA (Foreign Investment in Real Property Tax Act) applies when non-U.S. persons sell U.S. property, not when U.S. persons sell foreign property. So it does not apply here.

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Part 5: Selling Inherited Property in India

Inheritance is Not Taxable in the U.S.

• You don’t pay U.S. tax when you inherit Indian property.

• No need to report the inheritance itself.

• But keep records of the fair market value (FMV) of the property on the date of the original owner’s death (step-up basis).

Tax on Sale of Inherited Property

When you sell the inherited property, you must:

• Use the FMV at the time of inheritance as your cost basis

• Report any capital gains on your U.S. return

• Report rental income if the property was rented out (Schedule E)

Need Expert Help?

At India for NRI, we specialize in:

• Capital gains tax planning for U.S. NRIs

• Foreign Tax Credit and treaty benefits

• Indian and U.S. tax filing

• Repatriation and TDS compliance

• Legal advisory for sale and inheritance of Indian property