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NO! The foreign country charged INCOME TAX ($15K) on the gross proceeds of the sale amount ($50K). Their was no inheritance tax or cost basis involved. They charge a % of the sale amount as income tax. Everything we discussed was correct.
I have carefully reviewed our Q&A in this thread and realized I did not explore the option of taking the house sale foreign tax as a credit per your instructions from above in a previous reply (reproduced below in italicized font):
"As you navigate through the foreign tax credit section, your dividend and interest information is already reported. You need to report the sale of the house and report the gross amount of the proceeds..
- Go to Deductions & Credits
- Estimates and Other Taxes Paid > Foreign Tax Credit.
- Follow the prompts
- It will first ask you to report the income for the dividends and interest. In this case, you just need to check a box next to the dividends and interest to record the income.
- After this is done. There should be two country summary screens.
- When you get to country summary screen, select edit next to the country XX that reported the interest.
- Here it will ask you to report other Gross income XXX. You will report the Gross proceeds from the sale.
- Don't enter anything for expenses.
- Continue through the screen until it asks you to enter foreign taxes. Here you will enter foreign taxes on other income.
- Finish out the interview screen until you are done."
It turns out if I report the gross proceeds from the sale of the inherited house per these instructions, I can take ALL of the foreign taxes paid, including ones reported on 1099-INT and 1099-DIV, as credit and in that case do not need to itemize the house sale foreign taxes as a deduction. This would result in the most favorable tax outcome, as you can well imagine.
If I do what you suggest above, in Turbotax interview for France's Passive Income piece of 1116, I input:
Then I don't enter anything for expenses or losses as you suggested:
The first part of resulting 1116 looks like the following. The $600 in France's 1099-INT income and $500 itemized deductions are US personal property taxes.
and
Then I enter income taxes withheld on the house sale as you had indicated earlier:
This results in FULL credit of foreign taxes, where the house sale proceeds are treated as ORDINARY INCOME (not long term or qualified gains), 100% consistent with the treatment by France.
The MISTAKE I was making is that I was entering $100,000 of ordinary losses on this income (and $50 ordinary expenses, although that is less important) to be consistent with the US TREATMENT of this sale per 8949. If I do so, then the following is what I see. First picture shows the $50 expense for appraisal per 8949 and the second picture shows the $100,000 loss per 8949 ($50K sale price - $150K basis).
This results in modifications to the 1116 shown above. Note the changes on Lines 2 and 5.
This results in complete inability to take ANY foreign tax credit and all of it is carried forward which I will never be able to utilize.
SO the key difference between the two approaches is whether I treat the foreign proceeds from the sale of the inherited house as ordinary income, consistent with your instructions and 100% consistent with the foreign country's treatment of those proceeds, or do I treat the foreign proceeds from the sale of the inherited house as a short term capital loss (there is no provision in 1116 for a long term capital loss) along with expenses?
This question is key and your help will once again be much appreciated! I've taken a whole day to draft this reply, your careful review will be very valuable, please DM me or post a reply here if any more clarifications are needed.
