I am a US Resident and I have a property in Korea that I am going to sell. I have had that property for 10+ years. Currently, if I sell my property in Korea, I will be subject to paying 30% capital gains tax in Korea. If I decide to bring this money into the US, what type of taxes am I subject to? Am I exempt from being taxed on the capital gain since US Capital Gain Taxes are 25% and I paid 30% already in Korea? Please explain.
You are subject to the same capital gains tax rules as if the property were located in the U.S., but you may be able to take a foreign tax credit or deduction for all or part of the taxes you pay to the other country.
You can find an explanation of the foreign tax credit/deduction here: https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit
It's exactly as TomD8 said as far as I can tell.
Basically, the best option is to take the tax amount paid in South Korea (the 30%) and apply a foreign tax credit for the IRS federal tax. This credit will be weighted by the portion of the foreign income / total income for this year, and only that portion can be used to offset the capital gain taxes in the US.
Since the rate was 30% in your case for South Korea and 25% in the US, let's take a simple example.
You sold your property for a profit of 100, and paid 30% tax on it, or 30.
Meanwhile, in the US, your revenue was 200, so your total revenue for this year was 300 and the ratio of your foreign income is 100 / 300 = 33%, so only 33% of the 30 paid as taxes in South Korea can be used as a foreign tax credit for the IRS. The remaining 20 can be used as credit one year back or 10 years forward apparently, but again, only for the purpose of foreign tax credit.
With a capital gain rate of 25%, your tax amount would be 25, and you can apply 10 from the South Korean tax credit, and you pay an additional 15.
And then, there is the question of the state taxes. Unless you live in a state where there is no state tax, they will request a tax revenue on any amount your earn worldwide.
One additional point of clarification here.
Being a U.S. Resident and a U.S. Citizen are two completely different things. If you are a U.S. Citizen or a green card holder, you are required to report all of your worldwide income from all sources regardless of weather that income comes into the United States or not.
Thank you for the details. I have one quick question. In Korean tax documents, it shows two deductions (standard deduction about $2500 and special deduction about 30% of the net gain). Would I be able to deduct those in my U.S tax return? If I can, this will be huge effect on my tax return.
Thank you for your help,