Resident alien. Selling property in Mexico

[yodawalle123]

There are already a couple of questions that answer my questions, but I have some specific ones:

If I sell a property in Mexico (no construction), do I need to report it in my Tax form and pay taxe...

Solved: Resident alien selling property abroad

Basic one: we still don't have the green card. As far as I know, this doesn't affect the fact that we have to pay taxes or at least report what was paid.

The taxes were already paid to the Mexican government. I think there's some agreement to avoid double taxation, but I don't know if it applies to selling land (this was plain land, no house, no farm, no nothing).

The exchange rate changed in the time we owned the land (in other words, the value paid when we bought was more in dollars than what it says it costed in MXN pesos). Is that even taken in consideration when calculating gains?

And assuming the answers from some of those questions, what we have to do is report the gains, and report the taxes paid to the Mexican government, correct?

[JamesG1]

You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for calendar year 2024.

If you do not qualify under the Green Card Test, You may be required to file an IRS form 1040 under the Substantial Presence Test.  

IRS Publication 519, page 5, states:

Substantial Presence Test 

You are a resident for tax purposes if you meet the substantial presence test for calendar year 2024. To meet this test, you must be physically present in the United States on at least: 

1. 31 days during 2024; and 

2. 183 days during the 3-year period that includes 2024, 2023, and 2022, counting: 

  a. All the days you were present in 2024, 

  b. 1/3 of the days you were present in 2023, and 

  c. 1/6 of the days you were present in 2022.

The sale of the land would be reported on Schedule D Capital Gains and Losses.  Both the cost basis and the selling price would be converted to US dollars using the conversion rate at the time of the transaction.  It is possible that you could report a loss on the transaction.

In TurboTax Premier Online, report the transaction as follows:

1. Down the left side of the screen, click Federal.
2. Down the left side of the screen, click Wages & Income.
3. Click the down arrow to the right of Investments and Savings.
4. Click to the right of Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B).
5. Click Add investments.
6. On the Let's import your tax info screen, select Enter a different way.
7. On the OK, let's start with one investment type screen, select Other, land, second homes, personal items, then Continue.
8. At the screen Tell us more about this sale, enter the information.  Click Continue.
9. At the screen Now enter one sale, enter the IRS form 1099-B information.
10. Select Add another sale to add another transaction.

Foreign tax paid may qualify you for the foreign tax credit.  Follow these steps.

1. Down the left side of the screen, click Federal.
2. Down the left side of the screen, click Deductions & credits.
3. Click the down arrow to the right of Estimates and Other Taxes Paid.
4. Click to the right of Foreign Tax Credit.
5. Follow the screens to see whether you qualify for the credit or deduction.

[pk · Accepted solution]

@yodawalle123 , assuming  that you are a US person ( citizen/GreenCard /  Resident for Tax purposes ) and for US purposes :

1. In your particular case   this being un-developed land, there is no depreciation to consider,   your  gain/loss   =  Sales Proceeds  ( which is Sales Price LESS sales expenses such as  agent commission, recording fees , Escritura costs such as Notario charges/fees etc. etc. ) LESS  Basis  ( which is your  acquisition cost plus   cost of any improvements like fencing etc. ).  TurboTax will generally collect these bits of info and fill out the form 8949 / Schedule D and on to form 1040.

2.  Note all the  figures are in US$ and generally using  either dollar of the day or yearly average or similar.  So if your acquisition was in 2016 say, you need to use the yearly average  for that year to convert to US$.   Please keep record of  which exchange rate and source your used ( in case of a challenge ).

3. Mexico collects IVA   on all transactions -- this is a value added  tax. This does not appear anywhere  on the US return -- NOR is it eligible for Foreign Tax Credit.

4. Once you are done with this portion i.e. entry of the income from the sale of the asset in Mexico, you move to the  Deductions and Credits section .  Here  you can  claim  Foreign Tax Credit / Deduction  to reduce the  double Taxation bite.  TurboTax will walk you through filling out  form 1116  ( Foreign Tax Credit).  

5. Since US and Mexico has a Tax Treaty in effect,  the form 1116  will need the following  details  to compute the  credit ( to reduce your US tax burden ).  Foreign Source Income -- this the gross  gain from the transaction -- generally this will be the same as the gain  computed under US tax laws, as explained above.  Foreign Tax Paid -- this is the total tax you have paid  to Mexico .  Note that this does not include IVA -- it is ONLY the INCOME TAX / Capital Gains Tax you have paid.  This is because the treaty covers only income tax and excise taxes.

6.   While   the full amount of income tax paid is recognized  ( dollar for dollar ), the allowable  Foreign Tax Credit is the lesser of  actual paid  to foreign  taxing authority and that imposed by US   on the same doubly taxed income.   The rest is banked  and can be carried back one year or forward for 10 years.  Note  that to use the banked/carried forward  FTC, you must have Foreign Source Income in any year that wish to use the credit.

Does this answer your query ?  Is there more I can do for you ?

[yodawalle123]

thanks a lot for the detailed instructions.

[yodawalle123]

I think with that I know what information we have to gather. Thank you very much for your help