Adjustments on Capital Gains on Sale of Foreign Real Estate

Costs of sale are added to the property basis even if they are not deducted from the proceeds. 

@Tette  , Agreeing with  @Critter-3 ,  may I suggest that you familiarize yourself with the  form and the instruction for form 4797 at www.irs.gov.    TurboTax   ( my personal pref. for complicated returns is to use the  Home & Business  download/CD version ) will walk you through  all the expenses of the selling process   such as  commission , lawyer's fees,  sale preparation, transfer tax etc. etc.  Also  depending on the type of property  and how long held  there may be depreciation to consider .  But Turbo will walk you through these things.

Also this being a foreign real-estate, there is exchange rate of the day to consider ; for US purposes the basis  of the gain computation is generally acquisition cost   ( or FMV  if  acquired by inheritance ) plus cost of any improvements  over the years.

It would be nice to know which country you are talking about because  there may be differences  how the basis is computed for gains calculation.

For US purposes  there may be  depreciation recapture.

Please tell us more of the situation and one of us can walk you through.

You may want to read the following two IRS Pubs. :

https://www.irs.gov/forms-pubs/about-publication-523

https://www.irs.gov/forms-pubs/about-publication-544

Is there more I can do for you ?

What is the "seller's fee?" As mentioned most costs of a sale are deductible or increase your basis.

Not sure if you can use foreign capital gains tax to offset the gain. That doesn't feel right given the foreign tax credit (FTC). I'm certain that you can't do both. 

If the proceeds were deposited into a foreign bank account that you controlled, you make need to file an FBAR if the balance at any time exceeded $10k USD.

@Critter-3

Yes, that seems to be the case.

I'm adding the sale under Federal Income>Investment Income>Stocks, Mutual Funds, Bonds, Other

On the third page it asks me for fees and expenses not already deducted from reported sales price. That's why I believe all the above expenses should be entered.'

This is in Turbotax Deluxe 2022

@pk

Thank you. I've looked at those forms and pubs.

I already purchased Deluxe so perhaps I can stick with it. Something to think about for next year. Thanks for the suggestion. There's no depreciation. It's land. The acquisition cost in Finland is calculated as 40% of current value  if held for more than 10 years.

@Tette , sellers fees  ( my usage of the term ) are the   sales commission, any fees that have to be paid for the right to sell / transfer etc. etc. -- just a catch all term for all the paperwork type of fees that one pays in different countries   ( in the USA this would be realtor commission, inspection fees, up to code  fees/ expenses, title  insurance fees etc etc. )

 The foreign capital gain and  tax thereon  is a foreign tax  that is eligible for  foreign tax credit -- passive  category , just like any other capital asset sale.  The foreign income from the sales  ( the gain per the local tax laws   )  is foreign income that is taxed by a foreign taxing authority.   A form 1116 is required for this .

The US capital  gains and tax thereon is  computed under US tax laws and may be very different  from the  foreign capital gain. So yes  you can get capital treatment for this .  While  it seems  like you are  double dipping -- you are not.  The underlying asset  and disposal thereof  is being taxed  by two different  jurisdictions under  different  & local rules.

@jtax 

@Tette , that is nice to know   ( how Finland  computes basis  ), but  for US purposes , you have to  use the basis  as I described above.

 Yes , I think that version of TurboTax should be  good.

Please note  @jtax 's comment about FBAR  ( form 114 at  www.FinCen.gov -- online only by the  taxdue date  )  and I would add  FATCA  ( IRS form 8938  with your return ).

Is there more I can do for you ?

@jtax 

The seller's fee is the broker fee from the seller's (me) agent.

It appears that I'm allowed to use the foreign capital gains tax to offset the gain. My state does not allow FTC so this would reduce my state tax by a lot, which is the one I'm worried, given that the federal tax will be reduced dollar by dollar by the FTC.

I found this post.  In section 9.2 in the first answer DS30 says to include all expenses (like Turbotax said), and also the sales tax (capital gains tax?) Being that capital gains tax, broker's fee and attorney's fee are all expenses, it makes me think I should include them. 

@pk

I'm aware that I'm eligible for FTC, and I'm familiar with form 1116. What I'm unsure if I can offset the cost basis using the foreign capital gains tax,  lawyer's fee and seller's fee as expenses. This will only affect the state tax that I pay, since my federal capital gains tax will be $0 because of the FTC.

Thank you for the heads up for those forms.

@Tette  please see my answer on your refd.  thread -- I have added to it .

To answer your question --- No you basis   adjustment is ONLY due to cost of improvements ( + ) and  accumulated depreciation (-).

The cost associated with the sale/ transaction such as lawyer's fees, transfer tax etc. adjust your sales proceeds  (-).

Capital gain tax levied by a foreign  tax admin is eligible for FTC but does not affect the US  Tax filing ( form 4797 ) jut the form 1116.

Does this help ?  or is there more I can do for you ?

pk

@pk

Okay, I think I got it. I thought the basis was automatically being readjusted by itself, but I re-entered the adjustments and it stayed the same.

I won't include the foreign capital gains tax in the adjustment. It's not a business property sale, but I shouldn't matter I guess.

Thanks so much for your help!

My wife and her 3 sisters sold a Colombia commercial rental property in April 2024.  The FMV at the time of this inheritance is being determined.  There will be a capital gain but see questions.  Depreciation has never been taken.  Questions:

1) Owing to exemption rules in Colombia, there will probably be no capital gain reported on the Colombia tax return.

2) Is the situation stated #1 irrelevant to the U.S. capital gain calculation?

3) Colombian return for year 2024 gets filed in August/September 2025.  Is that irrelevant to the U.S. filing deadline for a 2024 sale?  It's possible there could be foreign taxes paid in 2024 but the Colombian "1098"s won't get issued until August/September 2025.  If there are foreign taxes paid in 2024, filed in Colombia in August/Sept 2025, would we just deduct those on U.S. 2025 return using 1116?

4) Does TT have a version that can handle the sale of a foreign rental property.  Very uncomplicated when it comes to operating expenses.  Almost none.  The commercial tenant has always covered all.  Other than real estate taxes, only minor expenses of moving rent from Colombia to U.S., such as transfer fees.

@hoyasaxa73 ,  first we need  few  items of information from you  to answer  your questions properly:

(a)  Are you and your spouse US persons ( citizen / GreenCard / Resident for Tax Purposes ) ?  If you / spouse  are not citizens then when  did  you become US persons ? 

(b) How  ( buy/ inherit / gift ... ) was the property  acquired ?   When was the property  first   put up for rent  ?

(c)  Was the rental income from the property ever recognized for a US return ?  and if not why ?

(d) Are you and your spouse residing in the US currently ?

 Generally the taxation of income in the USA proceeds  without regard to the tax laws of another country.  There are some  rule changes dictated by  a tax treaty between the US and another country.   But these are mostly on which country may tax which income  ( and how )  of a resident of one country earning an income in another country.

In the situation outline by you , US will tax the income as if the  property was located in the US under its own laws.  Obviously , Columbia will tax the  disposition under its laws  ( without regard to US laws, even though one of the owner may be a resident of US ).  This double taxation  of the same income  ( by US and Columbia) is generally eligible  for  tax credit .

My personal  choice  for such complicated situations is   Home & Business  Windows version of TurboTax.  It is a bit on the expensive side but covers all situations.

While this situation  and the filing thereof is a year away , please answer the questions  I have raised so we can  prepare you better  for 2024  tax year  ( foiling in 2025 ).

pk

@pk asks for some very helpful information. In the meantime @hoyasaxa73 here is some general info that might be useful.

First, form 1116 is for the foreign tax credit (FTC). It is a credit not a deduction. Deductions reduce your taxable income (a % of which will be your actual tax liability). Credits reduce your tax liability. Credits are therefore much better because you get 100% of them off your taxes. However, the FTC is very complicated and is limited. So you may also choose instead of the FTC to take any foreign tax paid as a deduction on Schedule A if you itemize (most people no longer itemize, so that might not be helpful and only gets you a deduction).

The FTC's purpose is not quite what most people think. It is not simply to give you a credit for foreign tax paid.  Rather it is to give  you a credit for what the US tax is on income that is also taxed by a foreign country. Because US tax rates are so low, this often results in little or no US tax benefit. E.g. If the foreign country taxed $100 of income @ 25% = $25 and the US gave that preferential capital gains rates of 15% = $15, the FTC would max out at $10. If the US rate were 0% (as is the case for some people -- google zero percent capital gains rate), there would be no FTC because there would be no double taxation.

Also the formula for the FTC is limited to a max of US Tax * [foreign income] / [worldwide income] ... if foreign income is small relative to all income, that will be a small number.

Finally re timing. 

For the FTC you may include foreign income taxes that are "paid or accrued" in the tax year ("TY") of the 1040 you are filing. If the foreign country return is for 2024 but filed in 2025 then the amount of foreign tax would seem to accrue in 2024 and you could include it on your 2024 return. Or you can do the default and include it in the year paid (sounds like 2025 for your 2025 1040 filed in 2026). Once you choose accrued you use that in future years. See page 18 of https://www.irs.gov/pub/irs-pdf/i1116.pdf

When dealing with these issues it is often helpful to file for a US extension until 10/15 to give you time to get the foreign country return filed first. It helps to arrange your withholding/estimated tax such that you don't need an early refund. And remember the extension is free and doesn't need a reason but it is only an extension of time to file, not to pay.

@hoyasaxa73  while agreeing with the excellent  reply ( about FTC ) by my colleague @jtax , just  wanted to add an underline  about the limitation  of FTC   per  section 904 of the IRC and the implication thereof:

"       (a)Limitation

Here's an interesting scenario.  We sold a rental property in Colombia in April 2024.  There are capital gains.  But, we don't file year 2024 in Colombia until August/September 2025, so whatever we will owe in cap gains won't be included in USA year 2024. I normally deduct Colombian income taxes as a tax credit.  Will it be strange to report the cap gains forms in 2026 for year 2024?

The way I would probably do it is to get a US extension for 2024 until 10/15/2025.

File the Columbian return in Aug/Sept 2025. At that point you know the foreign tax amount.

Then file the 2024 return with that amount of foreign tax as accrued and not paid. 

See pub 514, page 11 "In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. Generally, this occurs on the last day of the foreign tax year for which your foreign return is filed." And elsewhere in pub 514/form 1116 you may elect to treat foreign tax as accrued even if you are not an accrual basis taxpayer.

https://www.irs.gov/pub/irs-pdf/p514.pdf

If you deduct your foreign tax in the year paid (2025) then you might have a big timing problem. Your US income on the foreign gain was in 2024 not 2025. So your credit in TY 2025 might generate no reduction in us tax. (recall the credit is limited by I.R.C. 904 to the foreign tax paid times [foreign income / wordwide income] ... so if your 2025 foreign income is zero, the credit is limited to zero. https://www.law.cornell.edu/uscode/text/26/904

@hoyasaxa73 , while I agree with my colleague  @jtax  on  treatment of foreign  capital  asset  alienation / disposal, the issue here is that US and Columbia do not have a DTT  ( Double Taxation Tax Treaty ) in force at this time.  Thus  you may not be eligible  for Foreign Tax Credit on  asset disposal i.e. against foreign taxes paid to Columbia.

You still have to recognize the gain/loss on disposition of the property  and ONLY under US tax laws ( US taxes you on your world income as a US person ).

Is there more I can do for you ?

@pk why do you say there needs to be a treaty for a US person to claim the FTC? I do not see that in IRC 901 et. seq. The only requirement is that the income be foreign sourced-income. In this case it looks to me like IRC 862(a)(5) makes the gain from sale of foreign real estate be statutory foreign source income (i.e. from sources "without the United States").

What my experience tells me a treaty does is to either restate a  statutory rule (making sure both countries offer the same benefit) or to override a  rule. For example for US citizens living abroad, US-sourced interest or pension/401k/IRA distributions are often deemed by treaty to be of foreign source even though IRC 861/862 say otherwise. See, e.g., US Spain Treaty Article 11 compared to IRC 861(a)(1).

Am I missing something?