02 Dec If we sell property in Dominican Republic, do we owe U.S. tax?

Q. We live in New Jersey and own some investment property in the Dominican Republic, which apparently has no tax treaty with the U.S. When we sell, in addition to the Dominican capital gains tax, will we need to pay U.S. and N.J. capital gains taxes?
— Taxpayer

A. There are a few items to consider.

As a resident of New Jersey and of the United States, you must file tax returns and pay taxes on your worldwide income.

In order to avoid double taxation of the same income, both New Jersey and the federal government allow a credit for taxes paid to another jurisdiction, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“When you file your U.S. tax return, you would include the income from the sale of your Dominican Republic property on Schedule `D,’” Kiely said. “This would result in a higher federal income tax. Next you would complete Form 1116 “Foreign Tax Credit.” The credit calculated would lower your federal income tax.”

You would also include the Dominican Republic income on your New Jersey income tax return, Kiely said.

“New Jersey will not allow a credit for the tax paid to the Dominican Republic because this is a tax paid to a federal government,” he said. “If you had to file and pay taxes to a subdivision of the Dominican Republic equivalent to a state, New Jersey would allow a credit for that tax.”

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This story was originally published on Dec. 2, 2022.

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