Dubai: As an expat, wherever you choose to live or reside across the world, it is common to come across the term ‘capital gains tax’, particularly when selling your investments back home. Here’s all you need to know about this type of tax and how it can affect you and even help you save.
“The capital gains tax can be complicated for anyone, especially for those living abroad. The good news is that governments worldwide offers several tax breaks to help ease the burden,” said Masher Suleiman, a fiscal planning associate based in Abu Dhabi, who deals with overseas tax regulations.
“The ‘capital gains tax’ applies to profits made from the sale of various investments, including real estate, vehicles, jewellery, stocks, bonds, and at times even cryptocurrencies, and is applicable to those residing abroad.”
For example, as an expat, if you bought an investment like a house back in your home country for $300,000 (Dh1.1 million), or its equivalent in your resident country’s currency, and sold it for $350,000 (Dh1.3 million), you would have a capital gain of $50,000 (Dh183,652).
Calculating capital gain or loss can get complicated
On the other hand, if you sold that same house for only $275,000 (Dh642,784), you would instead have a capital loss of $25,000 (Dh91,826). However, this is a simple summarisation of the concept of a ‘capital gains tax’.
“While it’s basically a simple calculation, the actual calculation for determining a capital gain or loss are more complex. For example, you can use any improvements or repairs done to an asset to offset the capital gain amount,” added Suleiman.
“Generally, any time you sell an asset for more than you bought it, that counts as a capital gain. Apart from the UAE and the Gulf, most governments worldwide taxes capital gains under this tax. In most cases, the rate for this tax ranges from 15 per cent to 20 per cent based on your income level.”
The most common among assets that are taxed for its capital gains is property tax. This is levied by the authorities in most countries of the world every year or every six months and its rate depends on the total value of your property. But there are some countries where there is no such tax.
Aside from the above countries, there are no taxes on any capital gains made on sales of properties in island nations like Dominica, Cayman Islands, Malta, Turks and Caicos Islands, Cook Islands, Seychelles, and Faroe Islands.
How to estimate capital gain/loss tax on property sale
It is widely recommended that you figure out your capital gain tax by either using software that automatically makes the computations or have licenced professionals do it for you. You can also use a capital gains calculator to get a rough idea as there are free calculators available online.
“If you want to crunch the numbers yourself, there is a basic method for calculating capital gains tax,” explained India-based tax consultant Brijesh Meti. “First estimate the ‘original cost basis’, which is the purchase price plus any fees you paid, after which you determine your ‘realised amount’.
“The ‘realised amount’ is the sale price minus any fees you paid. The next step is to simply subtract what you paid from what you sold it for to determine the difference. This is the capital gain (or loss). This is followed by calculating your tax.”
Meti further explained that if you have a capital gain, multiply the amount by the appropriate tax rate to determine your capital gains tax for the asset. “However, bear in mind that tax rates differ depending on your taxable income and how long you held the asset before you sold it,” he added.
This would amount to a total of $380,000 (Dh1.4 million). To calculate a gain, subtract the sale price from the ‘cost basis’. So if you sold that home for an even $400,000 (Dh1.5 million), that would give you a capital gain of $20,000 or Dh73,461 ($400,000 – $380,000 = $22,000).
Key takeaways?
Depending on the details of the sale, an expat may or may not have to pay a capital gains tax. However, while all capital gains are taxable in theory, governments widely provide certain exclusions and credits you may be able to use to avoid paying the tax.
“While calculating gains or losses on the sale of a property is fairly straightforward, when selling a property overseas, you must consider foreign exchange rates,” said Suleiman. “This is because governments require converting all foreign currency amounts before calculating gains or losses.”
So, as exchange rates fluctuate widely, also consider the rate before you buy and sell. The exchange rate used for both buying and selling property will be considered the rate for the day unless otherwise specified. In fact, gains and losses can even be created by an exchange rate difference.
“Additionally, before buying a house in a country where there is no tax, also consider ‘stamp duty’, which is another type of tax that the government usually charges on the purchase of a property. This fee is typically one-time, so it’s hardly a financial burden,” Suleiman noted.
