In entering foreign tax credit for sale of 2nd home in another country - what type of income do I use?

[Imnotsure2]

Is the sale of a second home in a foreign country considered "General category income" under the Foreign Tax Credit form (1116), or is it considered "Passive category income", or some other category?

Thanks!

[KarenJ2 · Accepted solution]

It would be considered passive income for FTC purposes.

The gain/loss  is calculated for US tax purposes by translating the purchase price using the exchange rate on the date of purchase, the cost of capital improvements using the exchange rate on the date the improvements were made and the exchange rate to USD on the date of the sale.   

There is a secondary calculation if you had a foreign mortgage on the home  you sold.   

The Exchange Rate Gain from paying off a mortgage denominated in a foreign currency is treated as a separate transaction and is calculated by translating the amount of the loan using the exchange rate at the time the loan was originated and the exchange rate at the time the loan was paid off. The resulting “gain” is taxable as “ordinary income”  

These are entered in the investment section of TurboTax. prior to entering the information into Foreign Tax Credit section.

Follow these instructions: 

1. Open your return in TurboTax. (To do this, sign in to TurboTax and select Take me to my return button.) 

2. In the search box, search for sold second home and select the Jump to link in the search results. 

3. Answer Yes on the Did you sell any investments in 2018? screen.  

   • If you land on the Here's the info we have for these investment sales screen, select Add More Sales. 

4. Answer No to the 1099-B question. 

5. On the next screen, select Second Home (choose this also for inherited homes) or Land. Select Continue. 

6. Follow the instructions to completion. 

[Imnotsure2]

Thank you for the quick reply @KarenJ2 

Could you also point me to an IRS publication that states that the FTC for a sale of a second home is considered Passive income?

[KarenJ2]

It was by process of elimination:

General Category Income General category income is income that is not section 951A income, foreign branch income, or passive category income or does not fall into one of the other separate limit categories discussed later. In most cases, it includes active business income and wages, salaries, and overseas allowances of an individual as an employee. General category income includes high-taxed income that would otherwise be passive income. See High-taxed income, earlier, under What is not passive income. 

Passive income. Except as described earlier under Income from controlled foreign corporations and Partnership distributive share, passive income generally includes the following. • Dividends. • Interest. • Rents. • Royalties. • Annuities. • Net gain from the sale of non-income-producing investment property or property that generates passive income. • Net gain from commodities transactions, except for hedging and active business gains or losses of producers, processors, merchants, or handlers of commodities. • Amounts includible in income under section 1293 of the Internal Revenue Code (relating to certain passive foreign investment companies). If you receive foreign source distributions from a mutual fund or other regulated investment company that elects to pass through to you the foreign tax credit, in most cases the income is considered passive. The mutual fund will provide you with a Form 1099-DIV or substitute statement showing the amount of foreign taxes it elected to pass through to you.

What is not passive income. Passive income does not include any of the following. • Gains or losses from the sale of inventory property or property held mainly for sale to customers in the ordinary course of your trade or business. • Export financing interest. • High-taxed income. • Active business rents and royalties. • Any income that is defined in another separate limit category.

IRS Publication 514