Help: Foreign Tax Credit

Forum|Forum|2 years ago
October 11, 2023
3 replies
14 views

Hi!

I sold an inherited property in a foreign country. Due to the stepped-up basis, this turned out to be a small loss. However, the foreign country does not allow stepped-up basis. So I ended up paying substantial taxes in that country.

I did not live in the house or rent it out.

I entered the transaction under Investment Income -> stock, mutual funds, bonds, other -> sale of second home. The summary shows no capital gain or loss, which seems accurate.

Am I able to claim that as foreign tax credit? How do I go about it?

Thanks!

Anonymous_

Level 15

Paging Champ @pk12_2

pk_

Level 15

@playballarj , yes you should be able to avail of the foreign tax credit , unless limited by a Tax Treaty between US and that other country ( which country ? )

you would have to show the income from sale of the Capital asset in the foreign country as Foreign Source Passive income; then under deductions and credits tab, select " I paid Foreign Tax ", and then choose " credit" this will trigger questions for filling out the form 1116. Note that this foreign tax credit would be limited ( allowable for current tax year ) based on a ratio of foreign income to world income.

By the way , you mentioned about step up value -- there is no such thing for personal property such as second home -- for US tax purposes. Neither is there any indexing of basis ( as in countries like India ).. ONLY property that fets step-up to FMV is property of a decdent. .

Please tell me more about the asset and which country.

playballarjAuthor

Level 2

Thanks for your detailed response.

The country is India.

The property was an apartment. I inherited the apartment in May 2020 after death of my mother. And I sold it in March 2022. By stepped up basis, I meant the FMV on the date I inherited the property. That is, my cost basis would be FMV of the apartment on the day I inherited it (plus any costs associated with selling). Is my interpretation incorrect?

I had a small loss when I sold the apartment. When you say

"you would have to show the income from the sale of the Capital asset in the foreign country as Foreign Source Passive income"

Since I had a loss, in the foreign tax credit questionnaire, should I input the income as negative value?

I did try inputting a negative value and as you commented, it was showing that I would be able to take fraction of the credit and carryover the rest.

regards,

playballarj