Help: Foreign Tax Credit

[playballarj]

Hi!

I sold an inherited property in a foreign country. Due to the stepped-up basis, this turned out to be a small loss. However, the foreign country does not allow stepped-up basis. So I ended up paying substantial taxes in that country.

I did not live in the house or rent it out. 

I entered the transaction under Investment Income -> stock, mutual funds, bonds, other ->  sale of second home. The summary shows no capital gain or loss, which seems accurate.

Am I able to claim that as foreign tax credit? How do I go about it?

Thanks!

[tagteam]

Paging Champ @pk

[pk]

@playballarj , yes  you should be able to avail of the foreign tax credit , unless  limited by  a Tax Treaty between US and that other country  (  which country ? )

you would have to show the  income from sale of the Capital asset in the foreign country   as Foreign Source  Passive income;  then under   deductions and credits tab, select " I paid Foreign Tax ", and then choose   " credit" this will trigger questions   for filling out the form 1116.   Note that this foreign tax credit would be limited ( allowable for current tax year ) based on a ratio of  foreign income to  world income.

By the way , you mentioned  about step up value  -- there is no such thing for personal property such as second home -- for US tax purposes.  Neither is there any indexing of basis  ( as in countries like India )..  ONLY property that fets  step-up to FMV is property of a decdent. .

Please tell me more about the asset  and which country.

pk

[playballarj]

Thanks for your detailed response.

The country is India.

The property was an apartment. I inherited the apartment in May 2020 after death of my mother. And I sold it in March 2022. By stepped up basis, I meant the FMV on the date I inherited the property. That is, my cost basis would be FMV of the apartment on the day I inherited it (plus any costs associated with selling). Is my interpretation incorrect?

I had a small loss when I sold the apartment. When you say

"you would have to show the income from the sale of the Capital asset in the foreign country as Foreign Source Passive income"

Since I had a loss, in the foreign tax credit questionnaire, should I input the income as negative value?

I did try inputting a negative value and as you commented, it was showing that I would be able to take fraction of the credit and carryover the rest.

regards,

playballarj