Reporting capital gain on land sale overseas in Federal and California returns

[mjls]

I have a similar question as 

https://ttlc.intuit.com/community/taxes/discussion/reporting-capital-gains-on-sale-of-land-in-india-...

It was a different country.

And also 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/foreign-tax-credit-california-di...

I want to know whether the Foreign taxes paid can be included in the expense for Federal and California returns in TurboTax. Thank you.

Best,

JS

[jtax]

What kind of taxes? Transfer taxes/fees on the sale of the property are a cost of the sale and deductible, I would expect, just like deed recording fees/stamp fees would be in the US (based on the value of the property not the gain).

Foreign-Income taxes on the gain are not deductible as a cost of sale on your US returns.  You can claim an itemized deduction for them. Or you claim a foreign-tax credit (FTC) for some or all of the foreign-income tax paid. 

Note that the FTC does not return the foreign tax to you. Rather, it is designed to reduce the US tax on that gain. US capital gains rates are so low that you might or might not have any US tax to offset. But TT will walk you through that.

I can't speak to CA, but it looks like the prior discussions you cited covered that.

Here are some more details:

The FTC on "income from without the US" is granted by I.R.C. 901 and limited by I.R.C. 904 to

total US tax owed times [ income "sourced" in a foreign country / worldwide income]

https://www.law.cornell.edu/uscode/text/26/901

https://www.law.cornell.edu/uscode/text/26/904

One of the things sourced to a foreign country is "gains, profits, and income from the sale or exchange of real property located without the United States." I.R.C. 862(a)(5). https://www.law.cornell.edu/uscode/text/26/862

The US/India Treaty Article 1(3) says that no matter what the treaty says elsewhere (with a few exceptions), the US can tax its citizens on their worldwide income. India can tax your gain by Article 6 or 13 (I think). So even if the Treaty says only India can tax the income because of the location of the property, 1(3) says that doesn't matter. The US can also tax it.

25(1) is what prevents double taxation. It allows the IRC 901 foreign tax credit for US taxed income that is from "without the US." 

[mjls]

Thank you very much, @jtax .

The taxes included the capital gain tax and also the land tax paid for the sale to go through. My understanding is that California does not give Foreign Tax Credit. So using an example similar to the one in 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/foreign-tax-credit-california-di...

Sale of a Country-A (not India) land for $1M happened in 2024. For the sale to go through, the capital gain tax paid to Country-A was $200K, and the land tax paid to Country-A was 10K.  

The other expenses (etc. Broker Fee) $90K.

The net proceeds at the sale was $1M-$300K=700K.

I will appreciate answers (hopefully from all experts familiar also with CA rules) to the following questions:

• Can I add the $200K Capital gain tax paid to Country A to the expense for California?
• Can I add the $10K land tax paid to Country A to the expense for California?
• Can I add the $200K Capital gain tax paid to Country A to the expense for Federal?
• Can I add the $10K land tax paid to Country A to the expense for Federal?
• I should be able to take the $200K capital gain tax as the foreign tax credit for Federal, right?
• Can I claim the $10K land tax as foreign tax credit for Federal?

The US capital gain tax, Medicare tax and CA income tax for this sale seem pretty significant based on the current TurboTax calculation. 

Many thanks.

[jtax]

I cannot answer the CA questions. 

If the land tax is a property tax (unrelated to the sale) you cannot deduct it all all for a federal return. It might be different if you had rental income. See https://www.journalofaccountancy.com/issues/2018/dec/foreign-real-property-taxes/

For federal, you cannot remove the $200k foreign capital gain tax from the proceeds. Think of it as you got the $200k and then had to pay it. The net proceeds of the sale are $1M - $10k  (only if related to the sale like a US stamp tax, foreign tax not based on income) - $90k broker fee = $900k.

Your income is $900k - your basis. That is a capital gain. Call that $G.

You will not get back the $200k in foreign tax. What you will get back is the US tax on the $G capital gain, sort of. The US tax may be much less than $200k because US capital gains rates are so low. Sometimes, they are zero. So you won't pay twice. You will pay once (usually), but you will pay the higher of the US or foreign income tax.

1. if you itemize you can claim an itemized deduction for income taxes paid. I am not sure if the $10k SALT limit applies. But it's only a deduction.

2. The foreign-tax credit FTC will give you a credit for approx

the US capital gain tax on the property * [the foreign gain / your worldwide income)

That might be $200k. It might be less.

[mjls]

Thank you very much for your help, @jtax