Foreign rental real estate sold

[momona]

Chinese national bought a condo there in 2013 and lived in it until he came to the US on a student visa for graduate studies. He got married to a US citizen in 2018, and elected to file jointly even though he was on a student visa and got his green card in 2020. He is still a student in another state where he is getting his doctorate. His spouse plans to join him upon graduation this year.

He rented out his condo to a friend below market value so all income/expenses should have been declared as personal use days but it was declared as FMV. US-China tax treaty says wherever you sell the real estate is the country that may tax you. It really does say, "May tax you". Not shall tax you or can tax you but may.

Because of the value of the property and the period that he held it, the Chinese capital gain tax on that is zero.

I know because he rented out the place below FMV, it's a personal use property. Does that mean it's considered to be a personal residence too or am I getting the two terms mixed up? I know it may not be his primary residence now but from my understanding, his being a student made his absence temporary but he is still a student.

My questions are:

1) Because the chinese capital gain tax is zero, has he met his tax obligation? If not the next question is
2) Is a personal use property considered to be a personal residence? If so, when did he give up it being a primary residence? When he got married? When he got his green card?

Any insight or suggestions would be helpful. Stay safe and be healthy!

[ATSMAN]

I am not an expert on non US citizen taxation, but I think if he was a GC holder in 2020 he is considered Resident Alien for immigration and taxation purpose and the same rules that apply to citizens. So if that Condo was his personal residence and if he has met the Sec. 121 exclusion rules, no CG .

[Lion]

You'll have to look at the dates, count the days. When did he sell it? Did he live there as his primary residence for 2 out of the 5 years prior to the sale date? Did he intend to return to China and his condo? When did his intention change? If he even qualifies, then you'll need to research any China-US specifics.

[TaxGuyBill]

1) I am NOT an expert in Tax Treaties, but it is my understanding the the "Saving Clause" in the Tax Treaty revokes most of the provisions when the person becomes a Resident Alien. Please note that I said "most", not "all", and I am not familiar with the specifics of the treaty with China.

2) Most likely it stopped being his Principal Residence when he moved to the US and started renting out the home. Spending years in another country, he probably has all of his bills and driver's license use a US address, and the fact he declared it as a rental property all would indicate he did not view it as his Principal Residence.

[momona]

Thank you for the input and the mention about the savings clause. I am going to amend past Schedule E's to reflect that it was a personal use because he rented it below market value (3,000 a year). He opted to file jointly in 2018 on a student visa but didn't become a resident alien until 2020.

I think my biggest hurdle is that China taxes capital gains and determined his tax is zero because of the holding period and the gain being minimal; sort of like how the US charges zero capital gain on low income taxpayers. The tax treaty says the contracting state may tax the real property in the contracting state which it did. I just don't want the IRS to come back and calculate capital gain because he paid nothing in China even though it is the taxing rate in his particular case.

[Lion]

Amendments or Form 3115?

[Dude]

Seems like when he chose to file as a resident for tax purposes that invalidates any foreign treaty. Also I wonder if there is an FBAR requirement? After he sold the condo did the proceeds stay in a Chinese bank for a day? Was the rental income deposited into a foreign bank account over which he had control? If so was the balance ever over $10,000 even for one day?

https://www.fincen.gov/sites/default...structions.pdf

As far as his personal residence goes, it has to be your primary residence. https://www.irs.gov/publications/p52...ublink10008938 Temporary absences are ok but the fact that it was rented out even below FMV indicates he was not living there plus you are talking about an 8 year absence. Also, even though he was renting below FMV was he including this income on this taxes since he declared himself a resident for tax purposes?