Capital Gains For Portugal Home Sale

[mikjon]

My mother sold a home in Portugal last year and we are 3 siblings. Inheritance laws in Portugal stipulate that property is divided between spouse and children. After the sale of the home we will all be paying Portuguese tax on the sale of the property. Do I have to declare or pay any tax in the USA to the IRS for this transaction? I do not have any foreign bank accounts or funds anywhere. The proceeds from the sale went into my mother's Portugal bank account which she will be declaring on her IRS tax returns for 2020.

[ReneeM7122]

Yes, if you are a US citizen then you must report the sale and proceeds from the inherited home in Portugal.  The IRS requires taxpayers to report income from all sources both domestic and foreign.  It doesn't mean that you will have to pay US tax on it, because you can offset the foreign taxes that you paid to Portugal on your US tax return.   TurboTax will help you with this process.

To enter this transaction in TurboTax Online or Desktop, please follow these steps:

1. Once you are 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. On the next screen you will enter the sales information as follows
   1. Description – usually the address of the property sold
   2. Date Sold – Date you sold the property
   3. Date Acquired – Date you inherited the property
   4. Sales Proceeds – Total amount received for the property (in USD)
   5. Cost Basis – Fair Market Value of the property (in USD) at the time of inheritance.
   6. Adjustment Amount – leave this box blank (see attached screenshot #2)

Here is a TurboTax article that explains more about reporting the sale of foreign property.

You may also be required to file two special forms with your 2020 tax return:

• FBAR (FinCEN Form 114) 

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.   The name of the form to file If you have any questions or require technical assistance using the BSA E-Filing system, you may call them at 866-270-0733;  or if calling from outside the United States, 313-234-6146. 

Report of Foreign Bank and Financial Accounts

• Foreign Accounts Tax Compliance Act (FATCA)

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The IRS receives information about foreign assets on Form 8938 on your federal tax return. 

You must file the FBAR electronically through the Financial Crimes Enforcement Network’s BSA E-Filing System. You don’t file the FBAR with your federal tax return. 

Here is an IRS article that explains the comparison between FATCA and FBAR requirements.

[mikjon]

Ok thanks this was helpful. Two follow-ups, the FBAR and FATCA would only apply to my mother who is the only one of us with a bank account in Portugal where the proceeds were deposited correct? Also, since we are 3 siblings, the inheritance law in Portugal states that spouse receives 50% and than the remaining 50% is split by the spouse and siblings. So in our case it is 50 + 12.5 + 12.5 + 12.5 + 12.5. Is 12.5 the percentage of the cost basis and sales proceeds I should declare on my tax return?

[JeffreyR77]

Your are correct, FBAR and FATCA reporting applies only to your mother is she is the only one with property in her name in a foreign account.  Who Has to File FBAR?

Your capital gain for US tax purposes will be 12.5 % of the gain recognized between the fair market value of the home at the time of your father's passing and the sale price less costs of sale.  You are allowed stepped up cost basis on inherited property as of the date of your father's death.  

To enter the capital gain in TurboTax, follow these steps:

• Once you are in your tax return, click on Federal Taxes  
• Next click on Wages & Income
• Next click on I’ll choose what I work on (jump to full list or show more income)
• Scroll down the screen until to come to the section Investment Income
• Choose Stocks, Mutual Funds, Bonds, Other and select start
• The first screen will ask if you sold any investments during the current tax year (say yes)
• Since you did not receive a 1099-B, answer “no” to the 1099-B question
• Choose type of investment you sold - select everything else
• Some basic information:
  • Description –  Usually the address of the property sold
  • Sales Proceeds – Your proportionate share of the net proceeds from the sale (your portion of amount received for the property)
  • Date Sold – Date you sold the property 
  • Tell us how you acquired the property - inheritance
  • Enter the date inherited
  • Enter the your fair market value - Your proportionate share of the Fair Market Value of the property at the time of inheritance plus any capital improvements since inheriting it 

[mikjon]

I am confused as to how I can enter/claim the 28% tax rate paid for capital gains in Portugal. When I follow your instructions my Federal and State taxes increase a large amount.

[MaryK4]

You would have to enter the taxes separate.  TurboTax will guide you through the process.  See Where do I enter the foreign tax credit 

If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.

You can choose each tax year to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.

@mikjon