US Taxes on Indian Property: What NRIs in America Owe Both Countries

Every other tax guide on this site answers the Indian half of the question: what India withholds, what India charges, what India lets you take home. This guide answers the other half. If you are a US citizen, green card holder or resident alien, the United States taxes you on your worldwide income, and the IRS is explicit that you are subject to tax on worldwide income from all sources no matter where you live or where the asset sits.

So your flat in Surat is not just an Indian tax event. It is simultaneously an American one, governed by different rates, a different holding period, a different currency and a separate set of reporting forms. Most NRIs discover this after the sale, which is the expensive moment to discover it.

Living somewhere else? The same logic applies but the numbers land very differently. We cover each corridor separately: the United Kingdom, where a top-up to HMRC is effectively guaranteed; Canada, which taxes only half your gain; Australia, where the answer turns on your marginal rate; and the UAE, where there is no second tax bill at all.

The treaty does not do what most people think it does

The usual assumption is that the Double Taxation Avoidance Agreement stops both countries taxing the same money. It does not. It decides who taxes what, and where that fails, it hands you a credit.

For property, the relevant provision is Article 13 (Gains) of the India US income tax treaty, and it is unusually blunt. In full, it says that except for shipping and air transport, “each Contracting State may tax capital gains in accordance with the provisions of its domestic law.”

That is the whole article. Unlike treaties that assign gains to one country only, this one lets both India and the United States tax your property gain under their own rules. Immovable property is dealt with the same way under Article 6 (Income From Immovable Property): the country where the property sits keeps its taxing right, and your country of residence keeps yours.

What prevents genuine double taxation is Article 25 (Relief From Double Taxation), the foreign tax credit. You pay India first, because that is where the property is, and then claim the Indian tax as a credit against the US tax on the same income using Form 1116.

Hold on to one detail, because the rest of this guide turns on it: the credit is for tax you actually paid. Not tax you could have paid. Not tax you were assessed before an exemption. Tax that genuinely left your hands.

The Section 54 trap

Here is the trap, and it is the single most expensive thing on this page.

Section 54 lets you reinvest the gain from a residential house into another Indian residential house and pay no Indian capital gains tax. Every Indian adviser will suggest it, correctly, because on the Indian side it is excellent relief.

The United States does not recognise it. There is no provision in the Internal Revenue Code that honours a foreign country’s reinvestment exemption. So the gain stays fully taxable in America, and because you paid India nothing, you have no foreign tax credit to set against it.

Take a flat bought in 2015 for ₹40,00,000 and sold in 2026 for ₹1,20,00,000. The figures below are illustrative, using round exchange rates of ₹64 at purchase and ₹88 at sale.

Illustrative worked example, August 2026. Rates, surcharge tiers and exchange rates change; run your own numbers with a chartered accountant and a US preparer.

Read the last three rows carefully. Section 54 looked like it was worth ₹11.4 lakh. After the lost credit, it is worth roughly $1,900, about ₹1.7 lakh, and you buy that saving by tying up the entire sale value in Indian property for up to three years. An exemption most NRIs treat as obviously worth taking turns out, for a US-resident seller, to be worth around fifteen percent of its headline value.

It can still be the right call, particularly if you genuinely want another Indian property, or if surcharge pushes your Indian rate above your US rate. The point is that it is a real decision with a real cost, not the free win it appears to be from the Indian side alone. The same logic applies to Section 54EC bonds.

Two countries, two sets of rules on the same flat

Beyond the credit mechanics, the two systems simply measure things differently:

Positions as at August 2026. Confirm both sides before you transact.

Two of those rows cause most of the confusion.

The holding period mismatch means a flat sold at 18 months is a short-term gain in India, taxed at slab rates up to 30%, while the same sale is already long-term in America at 15%. India is the expensive side of that trade, which is why our capital gains guide pushes so hard on waiting out the 24 months.

The currency rule is subtler and catches almost everyone. The US computes your basis at the exchange rate on the purchase date and your proceeds at the rate on the sale date. When the rupee weakens over your holding period, your dollar gain grows more slowly than your rupee gain. In the example above the flat tripled in rupees but only rose about 2.2 times in dollars. Your Indian return and your American return will show different profits on the identical transaction, and both are right. You can model that gap with our currency impact calculator, and size the Indian side first with the capital gains calculator.

Rent is taxable in America too

This one is quietly forgotten. If you rent out your Indian flat, that rent is US taxable income even though it never leaves India and even after Indian tax has been paid on it. You report the gross rent, claim allowable expenses, and depreciate the building.

Depreciation is where foreign property is treated less generously. A US residential rental is depreciated over 27.5 years under the general system, while the Alternative Depreciation System runs to 30 years for residential rental property placed in service after 2017, and foreign-situs rental property sits on that slower ADS schedule. Indian tax paid on the rent is creditable in the same way as tax on a sale. Which Indian account the rent lands in matters separately for repatriation, covered in our guide on NRE, NRO and FCNR accounts.

What you must actually report

Reporting is separate from taxation, and the penalties for getting it wrong are disproportionate to the amounts involved. There is one genuinely good piece of news:

Your Indian flat itself is not reportable on Form 8938. The IRS states plainly that foreign real estate is not a specified foreign financial asset required to be reported. A directly-held house or rental property does not go on the form.

The accounts around it are a different story, and once a sale completes, a large balance usually lands in your NRO account and trips both thresholds at once:

Thresholds per the IRS FBAR and Form 8938 guidance, checked August 2026.

Note how low the FBAR bar is. It is an aggregate test across every Indian account you hold or can sign on, and it is measured at the highest point in the year, not at year end. Proceeds from almost any property sale will clear it on their own, even if the money moves out again a week later.

Do not forget your state

The treaty binds the federal government. It does not bind California, New York or New Jersey. Several states decline to follow federal treaty relief and some give no credit at all for foreign taxes paid. California is the usual culprit, taxing capital gains as ordinary income with no foreign tax credit, which can leave a substantial state bill sitting behind a perfectly clean federal result.

The sequence that actually works

Timing matters more than anything else here, because most of the useful choices close the moment you sign.

1. Talk to both advisers before you sell, not after. An Indian CA optimising your Indian bill in isolation can hand you a larger American one, as the Section 54 table shows.
2. Decide on Section 54 with the credit in view. Model the total across both countries, not the Indian saving alone.
3. Consider a lower deduction certificate so the buyer withholds closer to your real liability rather than on the full sale price. See our TDS guide.
4. Keep your exchange rate evidence. You need the rate on the purchase date and the sale date, sometimes decades apart, to defend your dollar basis.
5. Match the tax years. India runs April to March, the US runs the calendar year, so a single sale can straddle two US years and complicate when the credit lands.
6. File the reports even when no tax is due. FBAR and Form 8938 penalties are assessed on non-filing, independently of whether you owed anything.

Once the tax position is settled on both sides, the money still has to move, which is its own process covered in repatriating property sale proceeds. If the property came to you through family, read selling inherited property as an NRI first, because the Indian cost basis rules there change the numbers on both returns.

This guide explains how two tax systems interact, using official IRS and treaty sources current at August 2026. It is not tax advice, and cross-border property tax is genuinely one of the areas where competent professional help pays for itself many times over. Rates, thresholds and treaty interpretation change. Confirm your own position with a chartered accountant in India and a US preparer experienced with foreign property before you act.