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Level 3

# Foreign Tax Credit (Form 1116) on Sale of Foreign Rental Property - Gross Income & Definitely Related Expenses

I'm trying to figure out which figure should go in Line 1a (Gross Income) and which figure should go in Line 2 (Expenses Definitely Related To Income On Line 1a), in setting up Form 1116 for taking a Foreign Tax Credit against the Capital Gain on the sale of a foreign rental property.

Hypothetical example:

Sales Proceeds = 500,000

Original Purchase Price = 200,000

Closing Costs = 20,000

Accumulated Depreciation = 80,000

"Laymen's Gain" (ignoring accounting for depreciation recapture) = 280,000 (i.e. 500,000 less 220,000)

On Form 4797, this is allocated between land and building, the depreciation component only applying to the building. I'm presuming for Form 1116 the totals are all that matter.

So in Form 4797 language, we get:

"Gross Sales Price" = 500,000

"Cost Basis Plus Expense Of Sale" = 220,000 (i.e. 200,000 + 20,000)

"Depreciation Allowed" = 80,000

"Adjusted Basis" = 140,000 (i.e. 220,000 - 80,000)

"Total Gain" = 360,000 (i.e. 500,000 - 140,000)

Which amounts should go to Line 1a and 2 on Form 1116?

Option A: Line 1a = 360,000 and Line 2 = {empty} (i.e. gross income as "all-in" form 4797 total gain)

Option B: Line 1a = 380,000 and Line 2 = 20,000  (i.e. separating closing costs only as a def. related expense)

Or something else entirely where original cost and depreciation are factored into definitely related expenses?

I'm leaning towards Option A simply because no other part of the return seems to treat the cost basis and the expense of sale as two separate amounts. These are combined in Form 4797, so if I was to follow that convention I only have Option A or otherwise I have to put 220,000 into Line 2 and my Line 1a would end up representing sales proceeds rather than gain.

Even if different combinations of Line 1a less Line 2 would give the same answer in principle, you do get slightly different results for Line 6 and Line 7 depending on how you break it down.

Thank you for any input you are able to provide!

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