Almost daily, we are contacted by soon to be migrants to the US, along with migrants also making the move to New Zealand. However, prior to moving to the US, it is important to understand the much further reaching system of taxation in the United States, and how it may affect assets owned at the time of moving. One of the many considerations, is capital gains tax.
Understanding how this tax applies and ensuring tax advice is sought prior to any move, can help reduce the future burden.
In this article, we'll delve into the key aspects of capital gains tax for individuals moving from New Zealand to the US.
What is Capital Gains Tax?
For those unfamiliar with the term, capital gains tax is a levy imposed on the profit earned from the sale of assets such as stocks, real estate, or any other possessions. The tax is determined by reviewing the purchase price of an asset, and then also the sale price. The gain or loss is the difference between the two.
Capital Gains Tax in New Zealand:
Amongst many Kiwis, the concept of capital gains taxation is quite frequently misunderstood or even unknown, due to New Zealand (almost infamously) not having a wide reaching form of capital gains taxation.
In New Zealand capital gains tax is not levied on the sale of most personal assets, including the primary residence, unless the property was acquired with the intention of resale. However, certain assets, such as shares acquired as part of an employee share scheme or property acquired for the purpose of resale, may be subject to capital gains tax.
Capital Gains Tax in the United States:
In contrast, the United States has a comprehensive capital gains tax regime that applies to both residents and even non-residents for certain property. The US has two types of capital gains taxation, with short-term gains (assets held for less than a year) taxed at ordinary income tax rates and long-term gains (assets held for more than a year) subject to preferential rates.
Implications for Migrants:
For migrants making the move from New Zealand to the United States, the transition entails a shift from a system whereby capital gains taxation is rarely a consideration, to a more intricate one where capital gains taxation makes up a significant component of the tax system. Where this can begin to cause an issue, is upon becoming a US tax resident, whereby, individuals are required to report their worldwide income, including capital gains, to the IRS.
Tax Residency:
Generally, individuals who meet the substantial presence test, which considers the number of days spent in the US over a three-year period, are deemed tax residents. Additionally, those who obtain a green card and enter the US using the green card (or are granted it whilst in the US) are automatically classified as US tax residents. A US tax resident is otherwise known as a US person.
The issue at hand:
Upon becoming a US tax resident, all worldwide capital gains that a US tax resident makes, can be subject to US taxation. This includes any New Zealand based assets, even the family home.
Seeking Professional Guidance:
It is crucially important to obtain US tax advice prior to moving to the US, in order to prevent wherever possible incurring any large US tax liability on the sale of New Zealand assets.
In addition, certain non-US investments can also be taxed on the unrealised gains made, meaning the value increase each year can be considered taxable income in the US, even if the asset isn’t sold.
By understanding the implications of capital gains tax and proactively planning for its impact, migrants can mitigate potential financial burdens and ensure compliance with the tax laws of both countries. With careful preparation and professional guidance, individuals can embark on their journey with confidence, knowing that they are well-equipped to navigate the complexities of cross-border taxation.
If you’d like to discuss further, reach out to us today – info@usatax.nz