I have sold property in a foreign country. Where do i report the sale and the estimated taxes paid to the foreign government and get a credit for it ?

[laks]

The foreign government has its own form as recepit for estimated taxes paid. Also , Is there a specific edition, like Basic, Deluxe or Premier I should be using ?

[pk · Accepted solution]

@laks 

Very generally the recognition of disposition of  a foreign asset ( i.e. situated in a foreign country  is the same as if the asset  was  located  domestic.  However, there are some ands, ifs and buts.

(a) Which country was the property located in?

(b)  How  ( purchase/ gift / inheritance etc. ) did you acquire the asset, when did you acquire the asset?  When did you dispose off the asset ?

(c) How  was the asset used    ( as your main home / second home /  rental property etc. )?   Periods of use ?

(d)  What is your  immigration status ?  If not a citizen, when did you enter this country and with which visa ?

Please answer my questions.  I will circle back once I hear from.  Note that if  the answers get into regions that may not be of  general interest  or for reasons of privacy , you can PM me  ( just NO PII -- Personally Identifiable Information, please ).

Look forward to hearing from you 

[laks]

Hi PK

Thank you for the quick response and apologies for being in tardy in responding. Here is the answer to some of the information that you requested

(a) Which country was the property located in?

India

(b)  How  ( purchase/ gift / inheritance etc. ) did you acquire the asset, when did you acquire the asset?  When did you dispose off the asset ?

I purchased it.  The money handed over to the developer  on a schedule  from 1998 and the official registered  agreement was  made in 2006.  I disposed of the asset in 2024.

(c) How  was the asset used    ( as your main home / second home /  rental property etc. )?   Periods of use ?

My parents lived there for a while. I did rent it out for 10 years or so, declared the rental income on 1040  but never  claimed any depreciation on the property, if that is relevant.

(d)  What is your  immigration status ?  If not a citizen, when did you enter this country and with which visa ?

Let me provide as much details as I think may be relevant. I was on a H1-B visa when the sale deed was signed and a green card holder at the time the asset was handed over to me.  I am a citizen currently.

Let me know if you need anything else from me.

[pk · Accepted solution]

@laks  thank you very much for all the information you provided.   The pertinent  items are 

1.  you are a US person and have been so during  this  whole episode.

2. You bought the property  in  2006  ( closed / beneficial occupancy )

3. From 2006 through 2014 you used  the prop. for personal use.

4. 2015  through 2024 you used the prop.  as income property, recognized  for US purposes  on Schedule-E

5. You did not use any allowable  depreciation.  Note that for US purposes , it is not material whether you actually used the depreciation. The fact that it was allowable  means that  you have accumulated

depreciation for purposes of  gain/loss computation.

6  You can go back for all those years  and correct the returns to include the depreciation and hopefully you can  create suspended losses ( again this depends on exact facts and circumstances ), but obviously  if you were in a refund  position ( already or because of the  depreciation ) then only the last two years  would get you any monies back.

So for US purposes  and only for 2024, you tell TurboTax that the property on Schedule-E has been disposed off.  This should trigger  the interview for form 4797  ( sale of income  asset ).  Note that 

                  (a) your   basis = Acquistion cost + cost of any improvements over the years                    

                  (b)  your  adjusted basis   =  Basis  LESS accumulated allowable depreciation ( whether taken or not  )

                   (c) Gain/Loss =  Sales Proceeds - adjusted basis.

                    (d) Sales Proceeds = Sales Price LESS sales prep costs + all sales related costs  ( transfer tax, commission, suspended losses etc. etc. )

                   (f)  Taxation of the gain --- all gains up to and including accumulated  depreciation is  treated as Ordinary gain & Taxed at your marginal rate;  the rest of the gain is treated as Capital gain.

Another item to note is that  if India  has taxed you on the gain on the sale of this property ( the final settled amount  , not  the TDS amount ), this may be eligible for  foreign tax credit. The allowable credit for the year would be lesser of actually paid or the amount US  has taxed on the same  gain.  Here you have to be careful that you do include the  correct foreign source amount and the correct foreign tax , using form 1116.

Does this help ?  Is there more I can do for you ?

Namaste ji

pk

[laks · Accepted solution]

Dhanyavad PK-ji for explaining the complicated situation so nicely. 

It seems odd that the Indian tax code, to the best of my knowledge, does not permit depreciation to be claimed on personal rental assets while the mere act of renting a property allows uncle Sam to dip into your pocket and claim regular income on the depreciation.

One final question. The tax cycles for India goes from Apr 01 thru Mar 31. So the final computation of the Indian  tax will be done after the US Tax year. So do I need to wait until US Tax year 2025 to claim the foreign tax credit ? Thanks

[DaveF1006 · Accepted solution]

 Yes, wait until 2025 to report your foreign tax paid since India hasn't determined what your foreign taxes will be.

[pk · Accepted solution]

@laks , Namashkar  LAKS babu

If my answer has satisfied your query, please could you accept / cheer this post so it closes ( and not ask for more input ).  Of course  if that is not the case, tell me what more I do to earn your acceptance .

pk

[laks]

Hi DaveF1006,

Thinking through this, when do I report the sale, on the 2024 1040 or on 2025 1040 ? If I report the sale on the 2024 1040, won't  I will be liable for paying capital gains on it  ? I have already paid estimated taxes to the foreign govt (called TDS) and it would be odd if I have to pay capital gains on the US return for 2024 and then claim the credit next year.

[pk · Accepted solution]

@laks , while generally agreeing with @DaveF1006  that the final amount of taxes imposed by India  on  Calendar year 2024 sale of capital asset  will not be available till after end of India 24/25 ta year,

1.  If  you want to recognize this foreign tax imposed  /allocatde to 2024 sale , you can ONLY report this on 2024 US tax return ---- therefore  either  :    

                      (a)   use an educated guess ( based on past experience or actual TDS )  for original and then  file an amended return  when the final amount is known    OR

                      (b)  request an extension and file US return ONLKY after the India return has been finalized.  Note that in this case your filing date is extended  but not the  paying date of tax liabilities or else face  interest &  possible penalty charges.

Hope this clears  up all issues .

Is there more I can do for you ?

pk

[laks]

Hi PK-ji,

I cannot thank you enough. Appreciate the  various options that you provided for declaring  the tax paid. It is obvious that you are a practising tax professional. I am sure that these responses will help other like me who are in the same boat. And help them make an informed decision of going DIY or hiring a tax consultant. Thank you once again.

[pk]

@laks  ji, Namaste.

I am glad that I could help you.  I am retired  and quite old  ( 84 ).

pk