Taxes on Property A Comprehensive Guide for Australian Expats in the USA

As an Australian expat living in the USA, it’s important to understand the impact of taxes on the property you own in both countries. Whether it’s income taxes, capital gains tax (CGT), local taxes, or inheritance taxes, being aware of your tax obligations will help you navigate the complexities of property ownership. In this comprehensive guide, we’ll explore the various types of taxes related to property in Australia and the USA, providing valuable insights for Australian expats.

Australian Property Taxes

Income Taxes

When you cease to be an Australian resident for tax purposes, the way you are taxed on income generated from Australian property changes significantly. As a non-resident, any income generated from Australian real property must be declared and taxed in your annual tax return on a non-resident basis. This means that there is no tax-free threshold, and your income is taxed at foreign tax rates.

When you file your Australian tax return, you can claim any tax paid to the Australian Taxation Office (ATO) as a tax credit on your US tax return. This applies to any property you retain in Australia as an investment property or any new property you invest in within Australia.

Changes to Capital Gains Tax (CGT)

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 no longer applies, except in limited circumstances.

If you have already moved to the US but plan to return to Australia at some point, you can regain access to the main residence exemption on a pro-rata basis, as long as you are once again an Australian resident when you sell your former main residence.

The 50% CGT discount available to Australian residents for assets sold after 12 months of ownership is not available to foreign residents for assets acquired after 8 May 2012. For properties acquired after this date, you can only utilize the 50% CGT discount on a pro-rata basis for any period you were an Australian resident.

It’s important to note that the CGT discount cannot be applied for any period of ownership when you are or were a non-resident. Even if you return to Australia as an Australian tax resident, you will be unable to apply the CGT discount for the time you were a non-resident.

Land Taxes

Land tax is applied on a state-by-state basis in Australia, which means the rules and calculations may vary depending on the location of your property. Some states impose a foreign surcharge on the taxable value of land, making your land tax costs 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 based on the value of the property. Stamp duty is applicable at the state level, so the assessment criteria, rate of calculation, exemptions, and reductions vary between states.

Declaring Australian Sourced Property Income

It is essential to declare any income earned from your Australian investment property on your US tax return. You can also claim a credit for any tax paid on this income to the ATO.

USA Property Taxes

The US has a more complex tax system with a wider range of taxes than Australia. Taxes in the US can be applied at the local, state, and federal levels, making the system quite complicated due to the country’s size.

Income Taxes

If you own investment property in the USA, you will be taxed on the income generated from renting the property. Unlike Australia, income taxes are applied at both the federal and state levels in the US. This means you are required to file both a federal and state tax return, unless you reside in a state that does not impose income tax.

Capital Gains Tax

The US has a capital gains tax regime similar to Australia’s. There are exemptions for primary residences, subject to certain conditions, and long-term capital gains (assets owned for more than a year) are taxed at a preferential rate.

While Australia offers a flat 50% discount after 12 months of ownership, the US applies a progressive preferential tax rate based on your total taxable income. The rate for long-term capital gains can be 0%, 15%, or 20%.

Local Property Taxes

Property taxes in the US are imposed by local governments, including counties, cities, and school districts. These taxes vary widely depending on the location of your property. In Australia, the closest comparison would be land tax, but there are key differences.

In the US, property taxes are assessed on the overall value of the home, including the land and property structure. Unlike Australia, where the main residence is typically exempt from land tax, US property owners are usually subject to property tax, even on their main residence.

The assessed value of your property determines the amount of property tax you must pay. This assessment is periodically reviewed, especially when significant changes are made to the property. Property tax assessment is based on a unit known as “a mill,” which is equivalent to one-thousandth of a dollar.

Some jurisdictions offer exemptions or deductions that can reduce your property tax liability. These exemptions and reductions may be based on factors such as the property being your primary residence, age, disability, or veteran’s status.

For states with a “homestead exemption,” property taxes are reduced for your main residence. Most states allow exemptions ranging from $5,000 to $500,000 for the main residence, with larger exemptions for married couples or joint owners. However, some states do not have this exemption at all.

Property taxes are typically due annually or semi-annually, depending on the jurisdiction. Late payments can incur penalties and interest, so it’s crucial to be aware of your local property tax requirements.

Transfer Taxes (Conveyance or Deed Taxes)

When you transfer property from one person or entity to another, you may be subject to transfer taxes, also known as conveyance or deed taxes. Transfer taxes are administered by local governments, resulting in significant variations between states and even counties within a state. The responsibility for paying these taxes and the amount payable can differ.

Estate and Inheritance Taxes

Unlike Australia, most US states have specific estate and inheritance taxes. Estate taxes are levied on the total value of a deceased person’s estate before it is distributed to the beneficiaries. Inheritance taxes, on the other hand, are imposed on the heirs who receive ownership of the assets.

These taxes are applied at the state level, leading to significant variations in rules and tax rates. Not all states impose estate and inheritance taxes.

Australian Tax Resident

If you are only living in the USA on a short-term basis and remain an Australian tax resident instead of becoming a US resident, different outcomes may apply. In this case, you would be required to file a US tax return as a non-resident and an Australian tax return as a resident, declaring worldwide income, including foreign income and foreign tax credits from the US.

Understand Your Property Tax Obligations

Dealing with taxes on property can be extensive, from property taxes imposed on ongoing ownership to taxes on rental income and capital gains. When you own property overseas and must navigate international taxes, the complexity increases. Since tax legislation can vary significantly, even between states within the same country, and laws are frequently updated, it’s crucial to seek up-to-date tax advice for your specific situation.

At Down Under Realty, we understand the unique challenges faced by Australian expats in the USA when it comes to property taxes. Our team of experts can provide valuable guidance and assistance to ensure you meet your tax obligations while maximizing your financial outcomes. Contact us today to learn more.

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