Hi! I have a weird question that TurboTax Tax Experts doubt on...
1. I have some foreign tax credit carryover from previous years. Few thousand dollars.
2. I was using apartment in Ukraine to receive additional income (rental income) but last year sold it. This property was entered in TurboTax as a foreign property (it asked for country). When I told TT it's sold it generated form 4797 and calculated long-term capital income this way: sale proceeds MINUS original cost MINUS expenses to sell PLUS depreceation I previously took. I assume this math is correct but it resulted in few thousand capital gain which I need to pay capital gain tax in US.
3. No tax on sale of that property was required in Ukraine as it was my only apartment and only one sale a year. It's their law. No tax paid in that country.
Now I'm thinking... Can I report the entire income from this sale as foreign sourced income and offset it with my existing foreign tax credit carryover? Again, no tax was paid to sell this property but foreign tax credit was accrued previous years for different reasons but it's still here. Can I use it?
However, as I see in TurboTax if I report it as sale normally it generates Form 4797 which doesn't allow to say it's foreign income. So, proceeds from this form are automatically added to my long-term capital gain and I do not see any way to offset it with foreign tax credit in any other form. The only way to offset it is not to report it as sale with TurboTax so 4797 will not be generated. Instead, I can open Form 1116 and tell it I had additional passive income, enter it there and offset it with foreign tax credit. If I do this way 4797 will not be generated but Form 1116 will just have one new line with some foreign passive income.
But is this correct? Am I legally allowed to report income from foreign property sale this way? It will result in 0 US taxes. Here I'm confused.. Is accrued foreign tax credit used ONLY to offset foreign tax paid (which was not) or it can also be used to offset foreign capital gain even if no foreign tax paid...
One important note here. I already filed with IRS electronically putting it to 4797 and not using Foreign Tax Credit. So, to use Form 1116 strategy I need to file amendment and put explanation in notes basically telling the IRS "I created form 4797 but now I think it's foreign income so I'm removing this form and adding it to 1116 and by the way Uncle Sam you owe me some additional refund now...".. Will IRS accept this? Can it trigger tax audit?
I've asked TurboTax experts and they were really confused saying it's super complicated question. One of them said I can do this and in case IRS doesn't accept they will support me during audit.
But I don't want to do something if it's not allowed upfront which I do not know...
Anyone can advice?
