# Aussie expat in the US with a tax challenge.



## BigFella (Jun 24, 2011)

I am an Australia citizen who has been living/working in the U.S. as an expatriate under an L1-A visa since September 2008. Just recently, my company has asked me to locaize to US payroll. As an expatriate, I have been living in rented accomodation in Phoenix, funded by my company. Contractually, my company has been handling all US taxes up until now and I have been paying Australian taxes using a "hypothetical tax" approach to handling my tax situation (i.e. I'm taxed as if I was still living in Australia). 

However, to "localize" to the U.S. I need to sell my home in Australia (which is still my "principle place of residence"). The house was purchased in 1999 for $456,000 and had about $400,000 of improvements in 2000. Indications are it will sell for around $1.4m. Do we need to pay capital gains tax to the US IRS on the sale of my principle place of residence in Australia ? 

I believe I'm classified as a "Resident Alien" of the U.S. having lived and worked here since Septemebr 2008. I don't have a green card yet, but if I localize my company has agreed to pay for that. My wife and three children are here with me. My wife does not work, but my children all go to elementary school. We do not own a home in the U.S.. Our only assets in the U.S. today are the furniture and a car. My salary is paid in Australian dollars into my Australian bank account by a branch sales office located in Australia. I have tax deducted from my salary as if I have been living in Australia. The plan was to localize to the U.S. in July 2011, apply for a green card, and then stay for perhaps another 3 years before returning to Australia in 2014. However, I need to sell my house (which has no mortage) to get the cash to buy a house in the US. Because I only have one home, I understand that Australia would treat that home as still my principle place of residence for tax purposes ? Even if not, I would think the capital gain would only be applied to that portion since I left Australia to live in the U.S. 

I notice there is a tax treaty between Australia and the U.S. enacted in 1983 and ammended in 2003. That tax treaty handles non-resident and resident aliens from what I've read. Article 6 of that tax treaty refers to "Income from Real Property". It states "Income from real property may be taxed by the contracting state in which such real property is situated.". Under the General Definitions section, Contracting State is either the U.S. or Australia depending on context, which in this case because the property is in Australia, refers to Australia. 
Article 13 in the tax treaty also refers to the "Alienation of Property". It states "Income or gains derived by a resident of one of the contracting states from the alienation or disposition of real property situated in the other contracting state may be taxed in the other state". 

There is a 41 page 'amendment' released in 2003, but to my untrained eye, I cannot find any commentary that modifies the above. In fact, there's a section/paragraph mid document that seems even clearer by stating "...the assets are subject to Australia tax jurisdiction regardless of the owners residence." And then specifically mentions "Australian Real Property" as having the "necessary connection to Australia" in order to qualify. So the long and short is that I've had advice that When I seel my Australian home I will have the pay tax on roughly $380,000 of capital gain (after various allowances and so forth) at a rate of about 15%, but could be higher on some parts to 25%. That's ugly. 

Does anyone have any experiences with this type of thing or can suggest any great tax advisors who can structure something to solve the challenge.

Many thanks................DA


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## Bevdeforges (Nov 16, 2007)

If you are on a L1 visa, I would think you are considered resident in the US since the day you had your visa stamped on entry. Normally under those circumstances the gain on your primary residence would fall under the usual rules - the first $250,000 of gain ($500,000 if you are married filing jointly) is exempt from taxes. After that, you would have to offset taxes paid in Australia on the excess portion of the gain.

What your employer is doing is transferring you from their "expat payroll" to their "local payroll." That's an internal matter to your company, but once you entered the US you became "resident" in the US - green card or not.
Cheers,
Bev


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## twostep (Apr 3, 2008)

USCIS - Resident Alien
With L1-A you are not considered Permanent Resident; your stay is tied to a visa with time limitations.
L1-A allows for up to seven years in the US. I cannot follow the logic of Green Card when you plan to return to Australia in 2014. Did I misunderstand your post?
Bev - Please correct me - as US resident you are required to file annual tax returns.
You will be able to offset some of your improvements against your capital gain with appropriate documentation.


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## Bevdeforges (Nov 16, 2007)

Twostep - yes, you are considered tax resident if you are on an L1 or L2 visa, regardless of your plans to return to your home country.

BigFella - one caveat on the capital gains rules for sale of a personal residence: They only apply if you used the home as your primary residence for at least two of the last 5 years before the sale. And if you are renting it out while you're gone, there may be depreciation rules that you have to apply for the period it has been rented.

But don't forget that your basis for the property is what you paid for it plus capital improvements (possibly much of the $400K you spent on improvements). The depreciation only figures in if you have been renting it out in the meantime.
Cheers,
Bev


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## BigFella (Jun 24, 2011)

Thanks. Looks like I'm porked on this one. Fancy the yanks taking tax on something for free ! Only on America !! What would be fair would be capital gains from when you land in the US, not from when you bought the property. Does any one happen to know a good expat Tax person in Phoenix, AZ. I sense I'm going to need it


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## twostep (Apr 3, 2008)

BigFella said:


> Thanks. Looks like I'm porked on this one. Fancy the yanks taking tax on something for free ! Only on America !! What would be fair would be capital gains from when you land in the US, not from when you bought the property. Does any one happen to know a good expat Tax person in Phoenix, AZ. I sense I'm going to need it


Fair and IRS does not go together. See PM.


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## Bevdeforges (Nov 16, 2007)

BigFella said:


> Thanks. Looks like I'm porked on this one. Fancy the yanks taking tax on something for free ! Only on America !! What would be fair would be capital gains from when you land in the US, not from when you bought the property. Does any one happen to know a good expat Tax person in Phoenix, AZ. I sense I'm going to need it


Oddly enough, that's exactly how it works. Capital gains only kick in from the moment you become resident in the US. You've been resident in the US since, what, 2008 and you're going to sell your residence back in Oz while resident in the US. Hence, you pay your capital gains tax based on your residence when you realize the capital gain. That's kind of how it works in most countries I'm aware of.
Cheers,
Bev


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## Glenning (Jul 4, 2011)

Bevdeforges said:


> Oddly enough, that's exactly how it works. Capital gains only kick in from the moment you become resident in the US. You've been resident in the US since, what, 2008 and you're going to sell your residence back in Oz while resident in the US. Hence, you pay your capital gains tax based on your residence when you realize the capital gain. That's kind of how it works in most countries I'm aware of.
> Cheers,
> Bev


I am also an Australian expat living in Phoenix and I think I can help with some of this, and also help you avoid some traps associated with green card issues. Would you like to discuss in person?

Glenning


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## Glenning (Jul 4, 2011)

I am also an Australian expat in Phoenix and I think I can help. Would you like to discuss in person?


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## BigFella (Jun 24, 2011)

G'day Glenning. Thanks for your message. I've not met many Aussies in Phoenix. Anyway, I found myself a tax agent last week that seems to know what he is doing. Hopefully ! I did try to send you a note privately but this system blocked me for some reason. If you still think it's worthwhile catching up, feel free to ping me a note with your number and I'll give you a buzz. Cheers......DA


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## Bevdeforges (Nov 16, 2007)

The PM system is reserved for those who have posted a certain minimum number of times (in order to avoid folks simply exploiting the PM system without contributing to the forum). 
Cheers,
Bev


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## Glenning (Jul 4, 2011)

BigFella said:


> G'day Glenning. Thanks for your message. I've not met many Aussies in Phoenix. Anyway, I found myself a tax agent last week that seems to know what he is doing. Hopefully ! I did try to send you a note privately but this system blocked me for some reason. If you still think it's worthwhile catching up, feel free to ping me a note with your number and I'll give you a buzz. Cheers......DA


Feel free to call me on


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## Glenning (Jul 4, 2011)

I understand that we need a minimum of 5 messages before we get elevated to the status of being able to communicate privately. Perhaps you could acknowledge this one, if you want to proceed?


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## BigFella (Jun 24, 2011)

I'm not sure if I've made my 5 yet Glenning. maybe this one will do it ?


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