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Good evening My wife and I live in the Cayman Islands and

Customer Question
Good evening My wife and...
Good evening

My wife and I live in the Cayman Islands and we are preparing to immigrtate to the USA. We intend selling our home in Cayman which has been our primary residence for the past 12 years. We have already purchased a home in the US which we intend to live in once we immigrate.

If we do not manage to sell our Cayman home before we move to the US will we be liable to any sort of Capital Gains Tax if we sell it once we are resident in the US?

Regards

Phil
Submitted: 6 years ago.Category: Tax
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Answered in 18 minutes by:
3/31/2011
Tax Professional: Lev, Tax Advisor replied 6 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,130
Experience: Taxes, Immigration, Labor Relations
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LEV :

Hi and welcome to Just Answer!

LEV :

 


If you sell a property after you become US residents for tax purposes (do not confuse with residency for immigration purposes) - and that property was your primary residence at least two years before the sale - you may exclude from your taxable income the capital gain - up to $250,000 for singles and up to $500,000 for married couples filing joint tax return.


Please see for reference IRS publication 523 page 11 - www.irs.gov/pub/irs-pdf/p523.pdf


Please let me know if you need any help or clarification.

Customer:

Thanks you for your answer. Could you please explain the criteria for becoming "resident for tax purposes"?

LEV :

You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for calendar year - see this publication page 4 - http://www.irs.gov/pub/irs-pdf/p519.pdf - you may also use the chart on the page 5 - Nonresident Alien or Resident Alien?

Lev
Lev, Tax Advisor
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Customer reply replied 6 years ago

We bought the land and built the house approximately 11 years ago. A significant postion of our documentation (including documents relating to the cost of the build) we destroyed during a hurricane (hurricane Ivan in 2004) How will the cost be assesed for tax purposes?

Tax Professional: Lev, Tax Advisor replied 6 years ago

Every effort should be made to find lost records, or partial records that may have "survived" a disaster. If partial records are recovered, they are the best place to begin a reconstruction.

A reconstruction of records is best approached in reverse order. In other words, begin with the end of the year and work backward. The following steps may be helpful in the reconstruction process:

  1. Determine exactly what has been lost.
  2. Determine if you lost the only copy of an item.
  3. For those items where you lost the only copy, rank the relative importance of the lost items, starting with those of highest importance.
  4. Make a list of the items you determine warrant the time and
    expense of reconstruction.
  5. Determine if there is a state, federal, or other agency from which you can request a copy of a lost report. For instance, from the Internal Revenue Service, you can request either a transcript of a filed return, or a photocopy of a filed return. Either can be certified as an actual copy and can take the place of your copy of a lost return. Transcripts are available at no cost.
  6. For items of public record, contact your local courthouse for a copy.
  7. For bank records, contact your bank. It could be expensive to get copies of canceled checks, but they are available.

You will want to evaluate the need for the records in relation to the cost of reconstruction.

There is no other way. but to recostruct all records.

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Customer reply replied 6 years ago
Thank you, XXXXX XXXXX very useful information. However, I am still not exactly clear on what number will be used for the cost of the house in determining the taxcable gain. We know that the house cost approx $450,000 to build, but may only be able to substantiate say $350,000 of the costs with back-up documentation. Additionally, would we need to have the house valued at the time we move to the United States, and would that figure be used as the cost basis?
Tax Professional: Lev, Tax Advisor replied 6 years ago

Additionally, would we need to have the house valued at the time we move to the United States, and would that figure be used as the cost basis?

The fair market value of the property may only be used as the basis for inherited properties.

If the property was purchases - we should use the purchase price.

If the property was constructed - the construction cost should be used.

 

There is no way to determine the exact basis if you do not have supporting documents. You need to do your best to reconstruct all records in the way mentioned above.

You do not need to provide all supporting documents to the IRS with your tax return. However in case of audit - all documents should be provided - so if any cost is based on your own estimations - please be realistic to avoid possible objections from the IRS agent.

Again - there is no simple and exact way to determine the cost basis. If your actual cost was $450,000 to build the property - you need to be able to substantiate that amount - otherwise - there is a risk that in case of audit the IRS agent might disagree with your reasons.

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Customer reply replied 6 years ago
Lev - thank you very much for the information - clearly it is in my best interests to try and find all documentation. Just to be clear on this question, if we move to the US in say August this year and sell the house prior to July 2013, the proceeds would not be subject to capital gains tax. If we sell the house after two years of moving to the US there will be a capital gains tax liability (subject to the deduction/allowance noted) and we will need every pertinent document we can find?
Tax Professional: Lev, Tax Advisor replied 6 years ago

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit. You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

  • You meet the ownership test - owned the home for at least 2 years during the 5-year period ending on the date of the sale;

  • You meet the use test - Lived in the home as your main home for at least 2 years during the 5-year period ending on the date of the sale;

  • During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return

Please be aware that the gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use - fro instance - if the property was rented.

See more information in IRS publication 523 -

http://www.irs.gov/pub/irs-pdf/p523.pdf
Lev
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