Adjustments on Capital Gains on Sale of Foreign Real Estate

[pk]

@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

The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year.  "

This is what @jtax  was referring using a simple  example of $25  foreign Tax .    This implies that your allowable credit for the year  will be based a  ratio of   tax on foreign income to that on world income  -- it is taking an average tax rate  to work this  out.   The point of this is that US can ONLY allow credit of the tax it charges  / levies on the  doubly taxed foreign income ---- it recognizes  your current year  taxes  paid to a foreign administration and also  the amounts  that have been carried  forward  but  allows  only approx. what it would have levied on the  foreign income  -- thus it meets  its obligation to  ameliorate double taxation effects.

So for the example  in he above post  you would have  current year allowable credit of $15 and $10 would be carried over .    Note that  if there are other treaty conditions, then there may also be adjustments  to the foreign  source income  to allow for  rate adjustments  per treaty.

  Is there more one of us can do for you ?

[hoyasaxa73]

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?

[jtax]

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

[pk]

@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 ?

[jtax]

@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?