Capital gains tax paid in Mexico

[dchoover1]

If I sold an investment condo in Mexico can I deduct the capital gains tax I paid to the Mexican Govmt? I am a US citizen and owned it for 11 years.

[pk]

@dchoover1 , short answer is YES -- your sale of an asset in Mexico when recognized  on your Us tax return should  make the foreign taxes paid on the income eligible for  US tax credit  ( Foreign Tax Credit -- form 1116 ).  Note though that any iva paid  may not be treated as  capital gains tax.

If you want more detailed discussion on this , please add details here  or PM me with details ( just NO PII --  Personally Identifiable Information ).

Will  come back on hearing from you 

[dchoover1]

Thanks for your quick reply!  I've been claiming the rental income and expenses for the past  10+ years, but last tax year there was no tenant so it could be sold.  The MX govmt takes 30% of the profit of the sale.  I paid this separately after the sale closed.

[pk · Accepted solution]

@dchoover1  thankyou for the answers to my questions

 ( a)  assuming that you have already reported the sale/disposition of  income property  ( form 4797 ) and  the gain ) per US laws )  have already been included   on form 1040.

(b) To claim the foreign tax credit you need to tell TurboTax that you  foreign  Tax  Credit   (under  Deductions and Credits tab and from the list of  "deductions and Credits", choosing Foreign Tax Credit.).  It should then  walk you through   filling out the form 1116.  You will need to input  Foreign Gross  Income  ( this generally should be  the  Gain from disposition of the asset   -- actually the lower of  gain computed  under US and Foreign tax laws ),    Foreign Taxes  ( Income  Taxes paid to a foreign taxing authority  under the ambit of the Tax Treaty between US and the other contracting country ).

(c) Note that  form 1116 will  use a ratiometric methos to allocate  your US tax liability  on this  "doubly taxed" income.  While US will recognize  the total taxes paid to a foreign taxing authority dollar for dollar, the allowable credit for the US tax year is the lesser of  actual amount paid  and the US imposed tax on the same income.  Thus  in the best case, you will get a tax credit equal to the US tax on the same income.   You carry back one year or carry forward the unused foreign tax credit --but usually this  is available  only with foreign income  ( same  form 1116 computation / limitation comes into play ).

Have I answered your query or am I  preaching to the choir ?

Is there more I can do for you ?

[dchoover1]

Thank you so much!  Great guidance and detail too.  This helps tremendously.