how to report real estate sales in india on us income tax return

[pk]

@mickeydude   Namaste ji

I will put my answers to your questions in Italics.

1. When determining cost basis, how do I convert the amounts paid to the builder in INR into USD? Do I have to use the then conversion rates? I got an apartment as gift from my brother, but he originally paid between 2006 and 2008. Where do I get the rates for all those years?

For US tax purposes,  when a gift, the basis in the hand of the recipient is the same as that of the donor.  Thus   it would be the acquisition cost plus cost of any improvements  while the donor owned it PLUS cost of any improvements  that you  did during your ownership.  Note that if the property  was ever used  for income generation then you must  recognize  depreciation ( per US laws ) for the gain/loss computation.. In your particular case  since  your brother bought the prop quite sometime ago, you can probably use  annual average  exchange rate published by the IRS -- or any other published rate.  But keep  track of which rate you used ( in case of a challenge )   Here is a source  for this  ---Yearly average rates | OFX (US)  

And yes you have to use the rates at that time.

2. I sold the apartment in Jan 2024, so the proceeds needs to be calculated using 2024 conversion rates. Correct? And I got lucky with the timing of the sale, I already reported this sale on my India return.

Since the sale was completed in 2024 , you will have to recognize this sale and  gain/loss ( per US laws  ) on your 2024 return.   If India taxed this sale ( either  indexed based or by the new method), that tax may be eligible for Foreign Tax credit  ( Form 1116 )

3. Instead of figuring out the older conversion rates, can we use the indexed purchase price and use 2024's conversion rate to determine cost basis?   No because your functional currency is US$, you have to convert using the  exchange rates  around the  time of transaction. 

4. If I happen to use older rates, the profit is going to differ from what I reported on my India return. If the US happen to compare these returns, the numbers may not match. Is that fine?

The gain loss computation and the tax thereon is going to be per country i.e. US return based on US laws and ITR based on Indian laws.  Thus the underlying gain may be very different ( depending on basis computation  and the allowable deductions by each jurisdiction ).  It is  a recognized  fact.  There should be no worry over this.

Note that for  FTC ( Foreign Tax Credit ), the allowable credit for the tax year is the lesser of that paid to India  and  that imposed by US ) US uses an allocation method based on ratio of foreign source income over world income ).

Is there more I can do for you ?

[mickeydude]

Thank you @pk for your explanation. I will go ahead with your method.

[mickeydude]

I have entered all my capital gains and added Form 1116 to compute the foreign tax credit, but TT is carrying about 80% of the tax I paid in India forward to next years. Will I be able to claim this credit in the future years even if I do not have any income from India? Any easy formula to calculate this credit going forward? Or to see how many years it takes to recoup the whole credit?

Thanks @pk 

[AmyC]

1.Yes, the credit is based on foreign income over total income. Foreign tax credit can be carried back one year or carried forward up to 10 years so you want to keep track of your credits and which year is used. See Topic no. 856, Foreign tax credit.

2. This credit can only go against foreign income. You may income from other investments - like a brokerage. 

3. The Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) page 2, part III, line 10 covers carryforward and carryback.  It also has calculating the credit which varies each year based on your foreign income.

[mickeydude]

Thanks for your reply @AmyC . The problem is, any time I make money in India, I need to pay taxes there. There won't be any scenario where I make money there and pay no taxes there. So technically I do not have any way to get these credits. Correct? And after 10 years, these credit forfeited.

[pk]

@mickeydude ,   Agreeing with the excellent response from my colleague @AmyC  on the foreign tax credit carryover/ carryback,  I am surprised at the  20%  credit figure.   Did you already file  the ITR ?  I ask because  I thought  per the  new  Capital gains determination rules  you can use the old  indexation path  with 20% tax slab or the 12.5% slab with no indexation of basis.  So  are you talking about  TDS amount of actual ITR with the best path ?  Just curious.

Note that  Foreign Tax Credit allowed  will never be more than  US tax on the same  doubly taxed income  ( per the tax treaty ).

Is there more  one of us can do for you ?

[mickeydude]

@pk Yes, I have filed ITR in India for the tax year 2023-24. The 20% I was referring to has nothing to do with the tax slabs in India.

The total tax I paid for the capital gains is around $4475, where as the credit I am getting back in only $773. When I calculate this %, I am getting credit only for 17% and rest 83% is being carried forward. I rounded these numbers to 80% being carried forward.

Question 1: Do I report this as a Passive category or General category? Passive looks more suitable.

Question 2: The credit can only be taken for the similar category income in the future years? Meaning, Passive category income from future year can use the General category credit in this year?

Question 3: Is there any way I can choose not to pay taxes in India and pay full tax in the US as I am not getting the full credit for the tax paid in India? To the extent I am missing on the credit, I am being double taxed. Right?

Thanks

[punjun2019]

Hi,

So to report purchase price paid over a period of 10 years , we shall convert each payment made into USD per currency rate for that year and calculate the acquisition cost...right?

[pk]

@punjun2019 , while laborious, it is best solution that you can justify.  For each year conversion you take the annual amount and convert using the yearly average ( IRS / US Treasury publishes  that ).

Is there more I can do for you ?

[punjun2019]

this is great, thanks.. A little tangential Question if you may provide ur inputs..

I had to amend 2023 return to include property sale in India (Dec 2023) which is still under processing.. now based on this discussion I would need to further amend that return post processing it to ensure currency conversation rate is factored in as that will impact the Gain calculation to be factored in capital loss carry over ..

I had capital losses carried over from 2022 that I factored in 2023 pending amendment..The Q is while determining capital loss carried over for 2024, shall I take into account further amendment to I will be doing later to include currency conversation rates ?

[pk]

@punjun2019 ,  yes, if the 2023 needs further amendment to correct the  currency conversion, then you need to do that and then flow that to your 2024.  However,  without an extension you are coming up against the 4/16 deadline.

 Just be cautious -- you are never going to be able to wring the last drop out of this lemon ---- FTC and  Capital loss carry over are generally diminishing return efforts.  Also  ( and I have no way to prove this ) the more amended returns you file, the more you are likely to be challenged.  It costs IRS quite a bit to process amended returns ( it is less today because you can e-file but it still needs to be looked at ) -- human intervention is expensive.  That is my view.

Good Luck