Michigan Tax on sale of property overseas

[abhishtu2]

In 2024, I sold a residential property in India and got substantial Long Term Capital Gain. I had not resided in that property for over five years. However, I paid tax on capital gain to the Indian authorities.

IRS permits me to set off the tax paid in India (which, incidentally, is much higher than my tax rate here in USA.

Am I eligible to claim this credit in computing Michigan State Income Tax as well?

Thanks.

[pk]

@abhishtu2 , Namaste  ji.

(a) Under the US-India Tax treaty and utilizing the double taxation clause,  US  will give  you credit for  taxes paid to India.  However, the amount allowable  in the  current tax year ( year in which the sale took place ), the best case scenario is for US tax on that same doubly taxed foreign source income is nil.  But generally it is far less than that.

(b) Most states including MI do not recognize  US-Other country tax treaties  ( some states  do  or have their own  with  a neighbor foreign country -- e.g. NY with Canada )

(c)  Also to note there is  that your gain/ loss on alienation of  foreign real-estate for US Tax purposes is based on US laws  ( no  indexing of basis as is done in India.).  And  it is the lesser  of the  two gains  ( US and India ) that is doubly taxed -- generally US gain  is higher.

Is there more I can do for you  ?

Namaste ji

pk

[abhishtu2]

Hi

Thank you for the clarification.

I am a US citizen residing in Michigan.

Actual tax I paid in India is much greater than what I believe the tax liability in USA.  While USA does not have indexation, my gain in dollar terms, as well as tax rate here, would ensure that my liability would be lower than what I have already paid in India. In effect, I believe my federal payments would be zero.

If I understand you correctly, Michigan does not recognize India-USA DTAA and hence my entire LTCG (calculated in dollar terms) on sale of the property will be taxed at the flat rate of 4.25% with no credit for taxes paid to Indian authorities. 

Thank you.

[pk]

@abhishtu2 , generally agreeing with your post.  I just want to make sure that  " in dollar terms" is not the  whole story.  Yes for US Tax purposes you use the  US dollar of the day ( i.e. published exchange rates effective  on the day) od the  transaction.  However there are also  rules for gain computation and what expenses are allowed to be included  as offset ---that is why I used the  term under US laws.  Also  the acquisition cost reckoning may be different  whether you directly bought or acquired through  gift or inheritance per the US laws.  Then of course there is the basis adjustment based on laws of each country and/or facts and circumstances ( including  how used  / depreciation allowable / step-up etc. )

Further  if the prop. was  qualified as Long-Term ( per US laws ), the tax treatment  would be capital gain tax rather than  ordinary  gain for both Federal and State taxes.

However, TurboTax would do all these  things for you -- all you have to do is answer the  questions posed.

Hope this heps.

pk

[abhishtu2]

Thank You very much.