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Selling Bali Villa Lease, USA Tax Obligations

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  • Selling Bali Villa Lease, USA Tax Obligations

    I am in the process of selling my leased villa in Bali and it looks like I might make a profit. I have lived here 7 years. from my research, the usa tax laws would allow me to exclude $250,000 in profit from taxation if I owned the property, but I don't find any information regarding selling the lease. anyone have experience with this or know what the situation might be?

  • #2
    First of all , I have no practical experience on this , only know a little about Hak Pakai and Indonesia income tax .

    I guess it may be necessary to differentiate between the "lease" under "Hak Pakai" and the usual lease as known in other countries . As I understood , an usual lease is under a private contract . A Hak Pakai/lease certificate is a notarized document and registered by the Indonesian government , regulated by the Indonesian Land Law and other specific government Regulations . I guess that the Indonesian income tax must be paid in order to register the name transfer of the property title (as it is done for the selling of a full ownership/Hak Milik property) - you can confirm this at any Kantor Pajak or with the notaris dealing with your case .

    Considering the above , in terms of tax I guess one could consider buying/selling a Hak Pakai property as an equivalent act as buying/selling a property in the way we know in other countries .


    ------------------------------------------


    Indonesian Land Law (UU no.5 Tahun 1960) - non-official translation
    Article 4.
    (1) Based on the Indonesian controlling rights as meant in Article 2 , there are types of land rights which can be given to and owned by a person, both alone or together with others, and legal entities

    Article 16.
    (1) Land rights as referred to in article 4 paragraph (1) are :
    a. hak milik,
    b. hak guna-usaha,
    c. hak guna-bangunan,
    d. hak pakai,
    e. hak sewa,
    f. hak membuka tanah,
    g. hak memungut-hasil hutan,
    h. hak-hak lain yang tidak termasuk dalam hak-hak tersebut


    --------------------------------------------


    Tax Treaty USA/Indonesia
    ARTICLE 4
    Fiscal Residence
    (1) In this Convention, the term "resident of a Contracting State" means any person who under the laws of that State is liable to tax therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature. For purposes of United States tax, in the case of a partnership, estate, or trust, the term applies only to the extent that the income derived by such person is subject to United States tax as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.
    (2) Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States:
    (a) he shall be deemed to be a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests);
    (b) if the Contracting State in which he has his center of vital interests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode;
    (c) if he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
    (d) if he is a citizen of both Contracting States or of neither Contracting State, the competent authorities of the Contracting States shall settle the question by mutual agreement.
    For purposes of this paragraph, a permanent home is the place where an individual dwells with his family.
    (3) An individual who is deemed to be a resident of one of the Contracting States and not a resident of the other Contracting State by reason of the provisions of paragraph (2) shall be deemed to be a resident only of the first-mentioned Contracting State for all purposes of this Convention, including Article 28 (General Rules of Taxation).
    (4) Where by reason of the provisions of paragraph (1) a company is a resident of both Contracting States, when it shall be deemed to be a resident of the State in which it is organized or incorporated.

    ARTICLE 6
    Income from Immovable (Real) Property
    (1) Income from immovable property, including income in respect of the operation of mines, oil or gas wells, quarries, or other natural resources and gains derived from the sale, exchange, or other disposition of such property or of the right giving rise to such income, may be taxed by the Contracting State in which such immovable property, mines, oil or gas wells, quarries, or other natural resources are situated. For purposes of this Convention, interest on indebtedness secured by immovable property or secured by a right giving rise to income in respect of the operation of mines, quarries, or other natural resources shall not be regarded as income from immovable property.
    (2) Paragraph (1) shall apply to income derived from the usufruct, direct use, letting, or use in any other form of immovable property.

    ARTICLE 7
    Source of Income
    (7) Income from the sale, exchange or other disposition of property described in paragraph (1) (a) and (b) of Article 14 (Capital Gains) shall be treated as income from sources within Indonesia or the United States, as the case may be.

    ARTICLE 14
    Capital Gains
    (1) Gains derived by a resident of a Contracting State from the alienation of property described in Article 6 (Income from Immovable (Real) Property) and situated in the other Contracting State may be taxed in that other State. The term "property described in Article 6 (Income from Immovable (Real) Property) situated within the other Contracting State" includes-
    (a) Where Indonesia is the other Contracting State, an interest in real property situated in Indonesia; and
    (c) Where the United States is the other Contracting State, a United States real property interest.
    (2) A resident of one of the Contracting States shall be except from tax by the other Contracting State of gains derived from the sale, exchange, or other disposition of capital assets other than assets described in paragraph (1) unless-
    (a) The recipient of the gain has a permanent establishment or fixed base in the other Contracting State and the property giving rise to the gain is effectively connected with such permanent establishment or fixed base, in which case the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services) shall apply; or
    (b) The recipient of the gain is an individual and is present in the other Contracting State for a period or periods aggregating 120 days or more during the taxable year.
    (3) Notwithstanding paragraph (2), gains derived by a resident of a Contracting State from the deemed alienation of assets described in paragraph 2 (i) of Article 5 (Permanent Establishment) and used for the exploration for or exploitation of oil and gas resources shall be taxable only in that State
    Last edited by marcus; 23-03-19, 11:49.

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    • #3
      Originally posted by Travelingrick01 View Post
      I am in the process of selling my leased villa in Bali and it looks like I might make a profit. I have lived here 7 years. from my research, the usa tax laws would allow me to exclude $250,000 in profit from taxation if I owned the property, but I don't find any information regarding selling the lease. anyone have experience with this or know what the situation might be?
      I am not a tax lawyer, but based on having done my own US taxes for the past 20 years, I believe that any $ you receive from the sale of the lease will be considered income. You have to report that income on your return, along with any other income, whether earned in the US or outside the US. As for deductions, I believe the deduction for filers that do not live in the US and can pass one of the two tests the IRS uses to make that determination is now at $103,900. So if you sold the lease for say $110,000, then after taking the foreign income exclusion (FEI), you would only pay tax on $6,100, which is nil.
      "My country is the world, and my religion is to do good." -Thomas Paine.

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      • #4
        I do not think capital gains qualify for the foreign earned income exclusion. If there is a lot of money involved, best to get advise from a tax professional experienced and knowledgeable in this area.

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        • #5
          thanks and thanks. i also don't believe it qualifies as earned income. i'm on the search now for a tax pro with knowledge of indonesia's situation.

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