Schedule D transaction not connecting to Form 1116 (foreign tax credit) worksheet

[sfmike]

I have a foreign real estate sale gain already on Schedule D — how do I associate it with a country for Form 1116 purposes? I sold land in Australia last year, and paid CGT there above the US tax rate. However this transaction is not recognized by TurboTax in the Foreign Tax Credit section.

TurboTax AI help said: "The foreign tax credit (FTC) generally does not apply to taxes on real estate sales reported on Schedule D, including land sales, because property taxes or gains from property sales are usually not considered creditable foreign income taxes."

My accountant in Australia (also licensed in the US), Claude and every source I have found online say otherwise. 

[Mike9241]

it has to be done through the Form 1116. But be careful how you answer the questions. The wording is weird 

It's required that all other FTCs from 1099s, compensation, and K-1s be entered first.

[sfmike]

Thanks. I already have a Form 1116 for interest income - do I combine the land sale on the same form or make a new one? TT advises that all income of the same type (passive income) share the same form.

[rogge1722 · Accepted solution]

Here is the procedure to obtain the foreign tax credit for foreign taxes paid on foreign capital gains/losses.

It is assumed that the reporting of all income including foreign capital gains/losses for U.S. tax purposes has been completed and the next step is to obtain foreign tax credit for foreign taxes paid using form 1116.

Some preliminary work has to be completed. Download the “2025 Instructions for Form 1116” and “Pub 514”.
Open the f1116 instructions and go to page 10. Under the heading “Adjustments to foreign capital gains and losses,” you will be using either worksheet A or B or the worksheet in Pub 514. The instructions will guide you to determine which worksheet to use. Whichever worksheet is used, after completion, you will have the amount to insert into f1116 line 1a if there is a gain or line 5 if there is a loss.

Next go to the foreign tax credit interview. Herein is a screen by screen presentation of a simplified scenario whereby the only income for foreign tax credit is the foreign capital gains.

1. Foreign Tax Credit
     Yes
2. Before We Begin
    Yes
3. Foreign Taxes
    Continue
4. Tell Us About Your Foreign Taxes
    Continue
5. Foreign Taxes
    Continue
6. Do You Want a Deduction or Credit?
     Credit
7. Reporting Foreign Taxes Paid
    Continue
8. No Other Income or Expenses
    No
9. Completing Forms 1116
   Continue
10. Foreign Tax Credit Worksheet
   Continue
11. Choose the Income Type
    Make the selection then Continue
12. Country Summary
   Add a country.
13. Country Name
     Select from the list
14. Other Gross Income-Country
       If there is a gain from the worksheet:
      In the description, enter “ Cap. Gains.”
     Enter the amount from the worksheet.
15. Definitely Related Expenses
      Enter any applicable amount.
16. Foreign Losses
    If you had a net foreign loss from the worksheet,
    enter it here.
17. Foreign Taxes Paid
      Enter the amount
18. Country Summary
    Done
19. Any Foreign Source Qualified Dividends or Long Term Capital Gains?
       Here, Long Term Cap. Gains refers only to capital gain distributions
      from a 1099-DIv.
Continue thru the remaining screens until finished.

[sfmike]

Thank you @rogge1722 - that got me through.

Very confusing process to add a second copy of Australia for the same type of income but it got me where I needed - then they get merged into a single form 1116. Also incorrect guidance from TurboTax AI was not helpful.