I will sell my apartment abroad in 2017. I will pay taxes abroad for it. Can I take tax credit here in April 2018 if my foreign taxes are also paid in early 2018?

[andreilinde]

I am asking because Form 1116 seems to assume that I will pay foreign taxes the same year when I sell the apartment, in 2017.

[Carl]

You taxes paid will be claimed on the tax return for the tax year in which they are actually paid. It does not matter what year those taxes are paid *for*. So taxes paid in 2018, will be claimed on your 2018 return.

[andreilinde]

Dear Carl,  Thank you so much for the response. I do understand it, but since I will receive the payment  in 2017, not in 2018, I wonder whether I will be able to take credit for it in 2019, when I will file my 2018 tax return? Usually I report the payment and take credit simultaneously, and TurboTax does it,

[Carl]

[Corrected Comment] Just realized I read your dates incorrectly. If you will receive payment in 2017, you report it on your 2017 taxes. we don't get to choose when to claim the income we receive or payments we make. We have to claim it in the tax year it occurs. So if you make a tax deductible payment in 2017, you have no choice but to claim it on your 2017 return, or don't claim it ever.

[SweetieJean]

but keep your eye out for any tax law changes between now and then.

[andreilinde]

Thank you so much, Carl! That is exactly the problem. To understand it, I tried to play with the last year TurboTax, assuming that I received money a year ago (just a test, not on my real tax return). There was no option to deduct taxes which I paid, because tax payment abroad is not a direct deduction, but something that I must do a year after the sale. This is the same as here: We pay taxes for what we received a year ago. It seems that it is difficult to avoid double taxation in this case. I will try to explore it in a more detailed way though.

[Carl]

I'm not understanding what there is to "Play with". Foreign taxes are deducted in the Foreign Taxes Paid section under the Deductions and Credits tab. Now if you're talking about property taxes on foreign rental property, those are claimed on the SCH E in the "taxes paid" box of the rental expenses section. I think that box is labeled "Real Estate Taxes" in the program. Or are you talking about sales taxes or some other tax imposed by a foreign taxing authority when you sell rental property?
Regardless, you claim it in the tax year it's paid.  We don't get to pick and choose here.

[andreilinde]

"Play with" was just an experiment, to understand how the program works. I found exactly what I expected - and what you emphasized: I can claim tax deduction only in the year I pay the tax. But there will be no sale in the year I will claim the deduction, so it seems that I will not be able to deduct it at all. If this is correct, then, if I decide to sell the apartment, I will pay the tax twice.

[CalCountry · Accepted solution]

Since your tax obligation "accrues" in 2017 but you will pay the tax in 2018, you may wish to review the "carryback" feature which might allow you to take credit in 2017 for tax paid in 2018.

See the instructions for Form 1116 at:
  https://www.irs.gov/pub/irs-pdf/i1116.pdf

From Page 17:

"You can carry back 1 year and then
forward 10 years any foreign tax you
paid or accrued to any foreign country
or U.S. possession (reduced as
described under Line 12, later) on
income in a separate category that is
more than the limitation."

Also from Page 17:

"Generally, you can take a foreign tax
credit in the tax year you paid or
accrued the foreign taxes, depending
on your method of accounting. If you
report on the cash basis, you can
choose to take the credit for accrued
taxes by checking the “accrued” box in
Part II. But once you choose to do this,
you must credit foreign taxes in the year
they accrue on all future returns."