Primary home abroad turned rental now sold

[matun]

Hi,

I had an property in Europe that I kept when moved to the US (California) because of work in March 2018. I started to rent it out in June 2018 when I figured I would stay for a bit and was planning to sell it but then Covid hit which made it difficult to setup. I kept renting it out, reported rental income and depreciation for it in the US. In August 2022 I finally managed to sell it (and payed taxes for the sale in EU)

Questions:

1. How do I report this in TT? Is it a normal property sale or is there a special section for foreign properties?

2. I know I don't qualify for the full 2 out of 5 year exclusion, but do I qualify for a partial? When I filled it in in TT it looks like I do but does the fact that I rented it out or have lived in the US for too long disqualify me?

3. I summarized the depreciation I've done during the years and added that back. Is that correct?

4. Where do I report foreign tax credits for the sale?

5. What date do I use for the currency conversion? Purchase date, sales date, or average? Or do I use the date for when the transaction was made?

6. Any other gotchas that I should be aware of?

Thanks in advance

[DaveF1006]

It is reported as a normal property sale except the depreciation schedule is different.  normally on a domestic rental the property is depreciated over 27.5 years.  since you rented your property in 2018, the depreciation is depreciated over 30 years instead of 27.5 years.

You qualify for a partial exclusion if:

• You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.

• You had no previous work location and you began a new job at least 50 miles from the home.

• Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

  Also if you captured the depreciation since you rented the house, that is correct. Make sure you use a 30-year depreciation schedule in recapturing your depreciation because this is the depreciation you will need to report as a recapture and not the actual depreciation you may have claimed using a different deprecation schedule.

All reporting is done with US dollars. So you may need to know what the USD equivalent for the currency amount on the purchase date and the sales date.  It may fluctuate between the two dates so you may need to do your homework to find out what the USD equivalent value was on a certain date. You might wish to use an average but if considerable time elapsed between the purchase and sale date, an average may not be accurate.

Finally, here is where you will list the foreign taxes paid on the sale. 

1. Open Turbo Tax
2. Go to federal>deductions and credits>estimate and other taxes paid
3. Foreign taxes >start
4. Start answering questions. Make sure you answer the question correctly about if this is the first year you are making the simplified  election
5. Answer the questions in the next screens until you reach a screen that talks about income type. This will passive income. 
6. Next screen is where you add the country your foreign income was earned in. 
7. Next screen will ask you what your source income earned in that country. Here you will allocate income earned while you were in that country.
8. You will continue answering questions until you get to a screen that says foreign taxes paid to XXXX. Be sure not to list a date at the bottom beyond 12/31/2022 or you won't get the foreign tax credit and will show up as an error in your return

{Edited 03/28/23} (4:36 PM PST} @matun

[matun]

Thanks for you reply @DaveF1006 !

Ok, normal property sale, different depreciation schedule, thanks!

I have a google sheet for conversion rates so I can easily use the rate for the respective date, purchase, sale and so on.

I have some follow-up questions:

1. Do you mean that depreciation is different on foreign properties in general or did 2018 have anything to do with that?
2. What do you mean that no partial exclusion exists? From what I understand the partial exclusion is usable  when you don't qualify for the 2 year rule. In my case work-move and partial would be from Aug 2017 (5 year look back) to Mar 2018 (ie. 9 months). That is not correct?

Thanks again

[DaveF1006]

Prior to 2018, the depreciation period for foreign properties was 40 years. This changed to 30 years in 2018.

I am sorry, you can claim a partial exclusion according to IRS publication 523. Look under the section Does Your Home Qualify for a Partial Exclusion of Gain? Because of your work related move, you should qualify for this exclusion. I apologize for my earlier advice. Here is the work related move requirement.

Work-Related Move

1. You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.
2. You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home. 
3. You had no previous work location and you began a new job at least 50 miles from the home.

Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

@matun 

[matun]

Hi,

It's strange because the first time I filled in the sale I did qualify for the Partial Exclusion of Gain while the second time I wasn't. I'm not sure if the amount of days rented excludes me somehow (it's about 1400 days the last 5 years).

Another issue I get is I don't know what do fill in for AMT Depr After 5/6/97 which shows up during reviewing when I file. I'm actually not sure what that means (I haven't lived in the US for more than 5 years so).

The third issue is the 30 years depreciation. I don't see any place to change the standard to 30 years.

Thanks in advance,

Mattias

[DaveF1006]

You might check prior depreciation schedules on your tax returns to see if there were separate AMT depreciation amounts reported in prior years. If not, you can use the same depreciation amount for the AMT question that were reported as regular depreciation recaptured for this year.

Regarding determining the partial exclusion for the home, use Worksheet 1 that is described in the following IRS publication. Worksheet 1 makes no mention of the time it was rented but will help you determine if you are eligible for the exclusion or not. I have included a snapshot what that worksheet will look like. Use this worksheet to determine if you qualify for a partial exclusion or not.  This way you will know whether or not you qualify and if you qualify, you may need to review your answers regarding the exclusion.

As far as changing the depreciation period in your property to 30 years,check the date you entered indicating the time you placed this into service. When it asks for available date, indicate a date it was available to be rented. in this case, a date after 01/01/2018. Don't confuse this with the date you purchased house. If the date that you first placed the rental in service is correct, and if it still isn't recording the 30 yr depreciation period properly, delete the rental worksheet in your list of forms and then reenter the information in your program. 

To delete and using Turbo Tax Online.

1. Now, click on Tax Tools in the black left menu bar at the bottom of the form
2. Go to tools>delete a form
3. Delete rental worksheet in the list of forms under the Schedule E listed in your return

If using software, go to the Forms mode in your return and locate the rental worksheet in the list of forms listed in the left portion of your program.  Select the form and it will appear in the right hand portion of your program. Select delete form at the bottom.

Here is an example on what Worksheet 1 looks like in determining your partial exclusion for your home.