Capital Improvement Calculation for Basis when Builder 'Paid' in Property Equity of Foreign Inheritance

[rl50]

Hello,

Father inherited foreign property 20 years ago with brother, half for each. This would be original FMV.

Years later, the structure was torn down and rebuilt into multiple apartments.

The builder was alloted some apartments in return for the construction.

Father and brother each left with one apartment each.

The two apartments were now worth significantly more than the original property FMV.

It would seem the cost basis for father's inheritance would now increase due to a capital improvement.

Should that increase be the difference between the value of the apartment when completed in local currency

and the original FMV?

Example, original FMV of father's share 50. Value of apartment when completed by builder, 80.

Sale of father's apartment in 2022 at 100.

So FMV of 50, add 30 to cost basis for capital improvement. Sales proceeds of 100.

And each should be converted to USD for the year they ocurred?

Example inheritance 2000, 50 into USD at 2000 rate.

Capital improvement in 2010, 30 into USD at 2010 rate.

Sale proceeds in 2022, 100 into USD at 2022 rate.

This property was never lived in or rented.

So additional bonus question, can all taxes, maintenance, utilities paid over the decades be deducted from

from sale proceeds? Seems, yes, but not 100% certain.

Thank you for any clarification.

[DaveF1006]

According to this unofficial source, the inherited basis of the demolished building is added to the basis of the land that the inherited foreign property is located on. The brand new buildings will have their own cost basis that began when they were complete without regard to the inherited basis of the demolished buildings. 

Now using your examples, the father's capital gain is 100-80=20.  Each transaction or value is reported in USD in the year that they occured. 

Now as far as taxes, maintenance, utilities, these can only be deducted if you rented the property and you were deducting these against rental income. The only thing that can be deducted from the sale proceeds is selling expenses such as advertising, broker fees, legal fees, and repairs made as part of the home sale. In addition, you may be able to claim a foreign tax credit levied on the sale of the property.

[rl50]

Thanks for the reply.

One clarification because it makes a difference due to different exchange rates for different years.

You gave 80 FMV (this is local currency not USD) as basis but is that based on 50 in year X and 30 in year Y for the cap improvement

or just 80 in year Y based on the FMV at the time?

If you convert the 80 for year Y into USD it is different than 50 in year X and 30 in year Y into USD.

[DaveF1006]

The FMV is determined at the time it was inherited. Use the exchange rate at the date of the inheritance.

@rl50