Foreign Tax Credit for TDS paid on sale of inherited property

[vk29]

Hello

I inherited property in India in 2020 and sold it in 2023. I received reduced amount of money after TDS (Taxes deducted at Source) was deducted from the sale price. I have filed income tax returns in India and part of the TDS was refunded, but not all of it. This all happened in 2023. Can I take Foreign Tax Credit for the remainder of the TDS amount on my 2023 tax return? Due to Exchange rate, estimated price of the property in 2020 is more than the 2023 sale price. So there is no profit.

[ThomasM125]

The foreign taxes would only be allowed as a credit on your US tax return to the extent of your US tax on your foreign income. Since you had a loss on the property sale, you would only be able to use the foreign tax credit if you had other foreign income on your US tax return in 2023. You could enter the foreign tax paid in 2023 to report the foreign taxes to generate a foreign tax credit carryover to future years when you may have foreign income, however. You can also elect to carry it back one year.

To enter your foreign taxes for the foreign tax credit (carryover), choose the Foreign Taxes option under Estimates and Other Taxes Paid, in the Deductions and Credits section of TurboTax:

[vk29]

I do have other foreign income but it is very small compared to the IDS I paid on the property sale

[vk29]

There was no profit in US dollars, per US law because US law calculates capital gain from the time of inheritance. Per Indian tax laws, there was capital gain calculated from the time of original owner's acquisition.  So TDS was paid in India on that Capital Gains

[MarilynG1]

Taxes paid to other countries qualify for the FTC when:

• You paid the tax on your income to a local or provincial government.
• You were legally obligated to pay the tax
• You have already paid or accrued the tax.
• You did not gain from paying the tax.

There are several types of Foreign Income you can report to claim a Foreign Tax Credit.

1. Section 951A category income: A global intangible low-taxed income (GILTI) made by U.S. shareholders of certain controlled foreign corporations but doesn't include passive category income.
2. Foreign branch category income: This involves business profits made by U.S. persons from one or more qualified business units (QBUs) in one or more foreign countries but doesn't include passive category income.
3. Passive category income: Includes income from interest, dividends, royalties, and annuities.
4. General category income: Includes your wages, salary, and any highly taxed passive income. Income becomes "highly taxed" for IRS purposes when the foreign country's tax rate is higher than the U.S. rate.
5. Section 901(j) countries: Countries the U.S. has sanctioned for repeatedly providing support for acts of international terrorism, countries with which the U.S. doesn't conduct diplomatic relations, or countries whose governments aren't recognized by the U.S. You must report earnings from any of them.
6. Resourced by treaty: Certain income resourced by treaty relates to tax treaties the U.S. has with other countries. Complete Form 1116 for this category if the country in which you worked has a special agreement with the U.S. about how it taxes your income as a foreigner. Under "resourced by treaty" agreements, all your income — including any money you made in the U.S. — counts as income from the treaty country when figuring out the taxes you owe.
7. Lump-sum distributions: These include income you received from a foreign-sourced pension plan.

This article has more details on Claiming the Foreign Tax Credit.

@vk29 

[vk29]

So does this mean I can claim Foreign Tax credit for the Capital Gain taxes I paid in foreign country on the sale of the property even though I did not make profit when FMV converted into $ at the time of inheritance is more than the sale price converted into $?

[DaveF1006]

To clarify, were you taxed strictly on the proceeds from the sale because it sounds like you never had a capital gains?

[vk29]

I did not have capital gains when amount was converted into US dollars. But the property was in India and in Indian currency, there was capital gain and I did pay capital gain taxes in India. In TurboTax - Wages and Income - Investment Income - There in no capital gain to enter since the amounts need to be in US $.

[AmyC]

Two steps to take:

1. You should enter the inherited house sale under investments, sale of stocks, bonds, other. It will go to form 8949 and on to Sch D. You can claim the loss on your tax return, up to $3,000 and have a carryover for future years, if necessary.

2. Enter the foreign tax paid on form 1116. Foreign tax not used this year can be carried forward up to 10 years and can be carried back one year, if you would like to amend.