Taxes on foreign home sales

When you are reporting the sale of your foreign home, you will include all taxes that are not considered foreign income taxes on the capital gain but are required related to the sale as part of the selling costs. So you will report the net sales amount by reducing the gross sales proceeds by all selling expenses (including any VAT or sales tax related to the sale).

Please click this link if you are unsure which foreign taxes are eligible for the Foreign Tax Credit - IRS - Foreign Taxes that Qualify for the Foreign Tax Credit

Please note that if this foreign property was considered your primary residence, then you do not need to enter the sale of your foreign primary residence if:

• You never used your primary residence as a rental or took home office deduction
• You have a loss on the sale of your home (Personal capital losses are not reported on your tax return)
• You did not receive a Form 1099-S and
• You meet the home gain exclusion (see below)

You can take the gain exclusion as long as you considered the home your "primary residence" for 2 of the last 5 years. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse. See  Sale of Your Home for more information on the exclusion.

Sale of a Second or Investment Home -

To enter this transaction in TurboTax, log into your tax return (for TurboTax Online sign-in, click Here and click on "Take me to my return") type "investment sales" in the search bar then select "jump to investment sales". TurboTax will guide you in entering this information (see step 6 below)  

Alternatively, to enter this transaction in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab
2. Next click on “Wages & Income”
3. Next click on “Add more income” (then "See list of all income")
4. Scroll down the screen until to come to the section “Investment Income”
5. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ (or “update” is you have already worked on this section)
6. The first screen will ask if you sold any investments during the current tax year (This includes any sale of real property held as an investment property so answer “yes” to this question)
7. Since you did not receive a 1099-B, answer “no” to the 1099-B question
8. Choose type of investment you sold - select Second Home (or everything else if investment home)
9. Some basic information:
1. Description –  Usually the address of the property sold
2. Net Proceeds – Net proceeds from the sale  (Reduce gross sales price by all selling expenses including commissions, VAT, foreign sales tax, etc.)
3. Date Sold – Date you sold the property
10. Tell us how you acquired the property - purchased
11. Any business or rental use? - if no, then select personal use only (Please note, if personal use only, you will not be able to deduct the capital loss since no capital loss is allowed for a personal use capital asset.)
12. Some Basis information
1. Date Acquired
2. Original cost basis
3. Cost of improvements

Although the transaction needs to be reported in USD, the Internal Revenue Service has no official exchange rate. In general, use the exchange rate prevailing (i.e., the spot rate) when the property transactions (the original purchase, capital improvements (if any) and the sale) took place. Please refer to the following IRS links for more information about Foreign Currency and Currency Exchange Rates and Yearly Average Currency Exchange Rates.

If your spouse paid foreign taxes on the this transaction, he will be allowed an offset for these foreign taxes on his US tax return.  If he take a foreign tax credit, his US tax liability will be reduced by the amount of taxes that he would have paid if the transaction took place in the US (see this link Claim Foreign Tax Credit). Turbotax - Claiming Foreign Tax Credits

Dear TuboTaxDeeS,

I really appreciate your prompt advice! To follow up,

1. I am married filing a joint return.
2. I meet the primary residence test, but my wife does not.
3. The foreign home sales will result in a gain greater than the $250K single person exclusion.
4. I must pay a substantial amount of taxes in the foreign country as mandated by the foreign country.

Are you saying that I can not and should not report the foreign taxes paid, and can and should only reduce the foreign home sales gross proceeds by the total amount of taxes?

Thank you very much!

You only would be able to claim a foreign tax credit on the sale for any foreign income taxes paid. Any VAT or sales tax paid on the property would not be considered foreign income tax and would be netted against the sales proceeds being reported.

Here is a link to the IRS website on what foreign taxes qualify for the foreign tax credit (all other taxes that do not qualify can be considered a selling expense) - <a rel="nofollow" target="_blank" href="https://www.irs.gov/individuals/international-taxpayers/what-foreign-taxes-qualify-for-the-foreign-tax-credit">https://www.irs.gov/individuals/international-taxpayers/what-foreign-taxes-qualify-for-the-foreign-tax-credit</a>

There is no foreign tax credit if following this procedure.

Are you trying to enter a foreign sale of real estate and the taxes you paid on that transaction? 

Yes.  The foreign home as a primary residence and foreign tax paid on this home sale.

When you have a foreign home sale, you also need to consider the following rules regarding the sale of foreign property.

The gain is calculated by translating the purchase price using the exchange rate on the date of purchase, the cost of capital improvements using the exchange rate on the date the improvements were made and the exchange rate to USD on the date of the sale. 

There is a secondary calculation if you had a foreign mortgage on the home  you sold.   

The Exchange Rate Gain from paying off a mortgage denominated in a foreign currency is treated as a separate transaction and is calculated by translating the amount of the loan using the exchange rate at the time the loan was originated and the exchange rate at the time the loan was paid off. The resulting “gain” is taxable as “ordinary income”  

We sold a home in India. Purchased a home in 2006 and sold 2020. Should we use the currency rate from 2006 to convert rupees to dollars and then use the sold date proceeds with date it was sold to determine the capital gains? 

Calculate your gain in rupees, then convert that amount into US$ using the exchange rate as of the date of sale.

Your 2020 economic profit is determined by your net profit in rupees as of the date of sale (in 2020). That is the only amount you will have available to pay tax in US$.

Gain = Sales proceeds in 2020 rupees -  Cost in 2006 rupees - cost of improvements in rupees (at time of improvements).

In a similar situation. Did you complete form 1116 for foreign tax credit? India deducts TDS on sale proceeds. Is that the gross income in form 1116?

No this is not gross income in form 1116. Instead it is an income tax paid from a sale of property. You can claim this as a foreign tax paid and add this your other foreign tax that you paid while completing your foreign tax information in your Turbo Tax return.

How do tax treaties play into double-taxation? In my case, USA-Latvia. https://www.irs.gov/pub/irs-trty/latvia.pdf

"The taxation of capital gains, described in Article 13 of the Convention, generally follows the rule of recent U.S. tax treaties, the U.S. model and the OECD model. Gains on real property are taxable in the country in which the property is located, and gains from the sale of personal property are taxed only in the State of residence of the seller, unless attributable to the permanent establishment or fixed base in the other State."

Does the above mean capital gains on sale of secondary home will be taxed by Latvia but not USA, or USA will still tax capital gains, but reduced by amount of Latvian taxes paid (which would increase the cost basis of the property)?

"ARTICLE 13 Capital Gains
1. Gains or income derived by a resident of a Contracting State from the alienation of immovable (real) property situated in the other Contracting State may be taxed in that other State."
USA is the contracting state and Latvia is the other contracting state, so

• capital gains taxed only in Latvia and claim tax treaty (https://ttlc.intuit.com/community/tax-credits-deductions/discussion/how-to-claim-a-tax-treaty-with-turbotax/00/304206#:~:text=You%20will%20report%20your%20income,so%20you%20cannot%20e%2Dfile.) ?
• or capital gains on full amount in Latvia and capital gains on reduced amount in USA?
• or capital gains on full amount in both countries but claim foreign tax credit in USA and have to itemize deductions?

Also does "may be taxed in that other State." mean it may be taxed on both states, as opposed to language like "shall only be taxed in the other state"?
Thanks!

The US taxes everything earned by it's citizens and residents.  You'll use the foreign tax credit to reduce the US tax bill dollar for dollar.  The US figures that way if the other country's tax rate is lower then the US gets the difference.

I sold my home early last year. not primary residence.  India indexes the purchase price to inflation.  Based on that calculation, my accountant reported loss on sale to the Indian Tax agency.  There was actual gain, but based on indexing, I had a loss for tax purposes.  How do I report this to the IRS?  The first choice is to convert the original purchase price to dollars based on the exchange rate at the time of purchase and convert sales price to dollars on the date of sale.  Then I have a capital gain.  The second choice is to calculate the purchase price as reported to the Indian authorities (indexed) minus the sale price.  In the latter case, I have capital loss.  Which one do I follow?  In the latter case, is the capital loss deductible against any capital gains?  Thank you for your response.

@RajNagarajan --

Unfortunately, current U.S. tax law does not allow for the indexation of capital gains.

@RajNagarajan , having gone through this thread -- I am aghast at some of the mis-information.

In your particular case :

(a) you bought / acquired a property in India  in 2006 for Rs. XXXXX  ( equivalent to US$ AAAAA at then exchange rate  );

(b) you then used / rented out etc. the property  ( should have been reporting  any rental income and if an income  property recognizing any allowable depreciation )

(c) you sold the  property in 2021  ( 2022 ? )  for  Rs. SSSSS (  equivalent to US$ BBBBBB  at the tnen prevalent exchange rate  ).  For simplicity lets assume the monies  were transferred to your US bank directly  without any bank account in India.

 For India  tax purposes  -- your gain  Rs. GGGGG  ( Equivalent to  US$ ggggg  ) would be  Rs. SSSSS less sales expenses  like commissions etc. LESS  basis  ( Rs. XXXXX time the indexing factor ).  You pay your capital gains tax  ( Rs TTTTT   equivalent to US$ttttt ) )  based on Indian tax laws .

Your foreign  income from the transaction is US$ ggggg and foreign tax US$ttttt.

For US tax purposes , you would use  your Adjusted basis as US$AAAAA + any US$ improvement expenses LESS any accumulated  allowable  depreciation ( whether recognized or not ).

Your Sales proceeds  is Sales price US$BBBBB  Less any sales  expenses  such as sales commision, attorney fees, transfer tax etc. etc.

Thus your gain is  Sales Proceeds LESS  Adjusted basis. and is taxable to the USA as capital gain.

So you file a form 4797 to compute the  US gain, you file a form  1116 to take credit for foreign taxes apid.

Does this make sense ?   Is there more I can do for you ?