Inherited foreign property sales more questions

[ppttcomm23]

I have read some posts regarding the sales of foreign property for US resident living in the States.  I know sales of foreign property is treated the same as that of domestic property albeit without 1099-S.  However, I have some more questions that I don't see them being addressed in the community forum.

My situation:

I am a US citizen/resident living in the USA. I inherited a foreign property together with my siblings (who are foreigners and not US residents) 13 years ago.  My siblings decided to sell the property in 2023 (realized some gains) and they will wire transfer my portion of the net proceeds to me from the foreign country to my US bank account directly (so no FBAR is required).  I am aware that I need to report the sales on form 8949, schedule D and/or form 1116 (to claim the tax credit I paid to the foreign government) in the year 2024 for tax year 2023.

My questions:

1. Does TurboTax premier desktop version include form 1116 that can e-filed with all of my other tax forms if I claim foreign tax that I paid?  If yes, which section of Turbotax premier handles this (just to be prepared for tax year 2023)?

2. Will my portion of the net sales proceeds which will be more than $100,000 also need to be reported on form 3520 even if I will report it on form 8949 and schedule D?  Note. I also received a gift of less than $100,000 in the same year as the sales of foreign property, which I don't have to report  on form 3520 because the gift is less than $100,000.  But if I have to report the proceeds from the sales of foreign property on form 3520 then I will have to report this gift as well, correct?

3. The proceeds that I will receive is the net proceeds after deducting taxes (which is 20% of the gain) and expenses.  When I report it on form 8949, should I add the taxes and expenses back on top of the net proceeds and claim the foreign tax credit on form 1116 in order to offset US capital gain tax so I won't be taxed the second time (capital gain) without form 1116 on the US income tax?

Thank you in advance for your help.

[AbrahamT · Accepted solution]

For questions 1 and 3, the answer is yes. you will report the gross proceeds on that form 8949 in Turbotax desktop Premier as follows 

Wages and income

Less Common income

then; Sale of your main home

then Sold A Home

then Adress of the Home you Sold-put the foreign adress

then here

Then to claim the foreign tax credit, you would do as follows;

Type in the magnifying glass in the upper right hand corner foreign tax credit

then hit Jump to foreign tax credit

then Foreign Taxes

then Tell Us About your Foreign Taxes

then Foreign Taxes

then Do You Want the Deduction or Credit, say take the Credit

then Reporting Foreign Taxes Paid

then No Other Income or Expenses, hit No

then Completing form 1116

then Foreign Tax credit worksheet

then Choose Income type, General category income

then Add a country

then Country name

the Other Gross Income- don't put in anything as you already entered the income on Sch D

then continue, continue and continue till you hit this screen

And that's where you enter the taxes paid on the property.

As far as filling out Form 3520, it seems that it is a requirement for "trusts" and gifts if you as a US citizen receiving from a nonresident alien 100,000 or more. No where do you mention whether this inherited property was set up in some kind of trust or what have you. As far as considering the inherited property as a gift, gifts and inheritances are treated entirely differenty for federal tax purposes. For example there is a gift tax for a mother gifting  a property during her lifetime. while there is an estate tax applicable only at the time of a mother's death. Like in your situation. you would only be taxed on the profits incurred from this inherited property as U.S. tax offsetted by the foreign tax paid on this profit in the other country.  In your situation, since the actual gift you received from your nonresident siblings is less than 100,000, you would not be required to file Form 3520. See HERE      Who Must file  #4

Good luck!

[ppttcomm23]

AbrahamT,

Thank you very much for your quick and detailed response. Just to clarify, my inherited property is not related to any trust. In this case, if I read your response correctly, the sales of the inherited foreign property is not a bequest or gift on form 3520, even if the net proceeds is more than $100,000. And, I don't need to file form 3520 for the cash gift (which is less than $100,000) either, even if I received both monies (proceeds and cash gift) in the same year 2023. In other words, the only thing that I need to do is filing form 8949/schedule D/1116 for the sales of foreign property in year 2024 and no need to file form 3520 at all, correct?  Thank you again in advance.

[DaveF1006]

 It depends. The instructions for 3520 state this should be reported if more than $100,000 is received from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests.  Bequests are gifts made as part of a will or trust, so if there was a formal will made at the time of the inheritance, than a 3520 should be filed for the proceeds of the sale as well as the gift.

This transcends into a gray area where you will need to make a decision on whether or not to report this on a 3520. I generally err on the side of caution and would recommend reporting this just to be safe.  Besides the 3520 is an informational form that will have no impact on your income taxes.

Definitely file the Form 1116 as well as reporting the investment income that is reported on Schedule D and 8949 in the manner that AbrahamT suggests.

@ppttcomm23

[axman98]

I have a very similar situation. I (with siblings) inherited my parents home in Germany after the death of my father  about 12 years go. My stepmother continued living in the house rent free until this year when we sold the house. Based on the assessment at time of inheritance and cost of sale,  I have  a net loss on the sale. Questions:

1) At time of inheritance I was assessed inheritance tax. Where do I add this? Can I add this to the adjusted base price)?

2) I walked through the instructions provided above, they seem to all assume that it was My Home (residence).(It hasn't been for about 50 years). Groping my way through the questions TurboTax throws at me it appears that I cannot take the "capital loss" against any other gains I have had this year because it was personal property? Is this correct?

3) The gross proceeds were over $100,000. Where do I report this foreign income (even though it was a loss)

Thanks much

[DaveF1006]

Yes, you may add the inheritance tax to the adjusted basis of the house according to PK as reported in this post. You will need to enter this as an investment sale and not as a sale of your own personal residence.  Here is how to report.

1. Working in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Personal Income" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on”
4. Scroll down the screen until to come to the section “Investment Income”
5. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ (or “update” is you have already worked on this section) (see Screenshot #1)
6. The first screen will ask if you sold any investments during the current tax year (This includes any sale of real property held as an investment property so answer “yes” to this question)
7. Since you did not receive a 1099-B, answer “no” to the 1099-B question
8.  Now you should see a screen like the one I listed below. What important is how you report how you received the investment, the proceeds, and the Fair Market value on the date of the inheritance plus the inheritance tax.

You are correct that you will not receive a capital loss for the sale.  IRS is only interested in gains.

@axman98 

[axman98]

thanks much! Very helpful. But it appears i can take the loss to offset capital gains, not so?