Foreign Land sold with capital gains

[RACI625]

I am a US resident in the state of IL. In 2024 I sold land inherited in India many years ago. The transaction was complete in September and T.D.S / T.C.S taxes (24%) were deducted from payments, net proceeds were deposited in India's Bank account owned by me then transferred to my US account. Since this land is inherited, the US calculates capital gains on FMV when previous owner died, however India Capital gains were on the entire purchase price. Not sure how to calculate FMV as it was years ago. Since India and US has DTAA,  how do I file my Tax Return showing sale of land with capital gains and taxes paid in India?

What I've so far:
Include sale of land - wages and Income - Investment income - form 1099-s

Deduction & credits - estimated taxes paid - foreign taxes. complete form 1116. took credit. selected passive income as type, add country and include foreign taxes on other income.

[DavidD66]

You will report the sale of the land in India as the sale of a Capital Asset, which is reported on Form 8949.  You will have to report the following:

• Description of Property (Something like "25 acres in XYZ India"
• Date Acquired  - this is the date you inherited the property
• Date Sold - Self explanatory
• Proceeds - This is your sales price, less any selling costs (e.g. sales commission)  You do not reduce the proceeds by the amount of foreign tax paid
• Cost or other basis - This is the value of the property at the time you inherited it.  If there were any improvements to the property they would be included.  

The tax you paid to India should not be reflected in the calculation of your gain.  You will be able to take a credit for the foreign tax paid on your US Tax Return.  You will have to come up with a reasonable method to determine the fair market value of the property at the time you inherited it, or use a cost basis of zero - $0.00 .   Be sure to document and keep your method of determining the fair market value when you inherited the property. 

[RACI625]

Thank you for the response. I am trying to include in Turbo tax deluxe 2024 however, even though I'm inputting taxes paid on the deductions, I'm still owing taxes on capital gains. 

Here's what I've done in Turbo Tax

Under investments, add investment type 1099-S.

Type of Investment - Land (other investment)

How did you receive investment - inherited

date sold - 

proceeds - total sales less cost, commission. taxes paid in India not deducted.

fair market value - estimated value when owner passed away.

Review - shows gains

In DEDUCTIONS:

Estimates and Other taxes paid - Foreign taxes

pay foreign taxes or have credits - yes

message saying I need to complete form 1116 if I want to claim tax credit.

taking tax credit

choose income type - Passive Income

Selected country - India

Foreign taxes paid

foreign taxes on other income - put amount paid via TDS

left all else blank (not sure if that's correct)

saved -- taxes owned on capital gains?

[DaveF1006]

To look at this in detail, we would like to see a diagnostic copy of your return. The information in this file is a sanitized copy meaning there is no personal information, only numbers so that we can troubleshoot in depth, check for calculation issues, and to see how certain items are applied. Here is how to order. 

For Turbo Tax online, go to tax tools>tools>share my file with agent.  When this is selected, you will receive a token number.  Respond back in this thread and tell us what that token number is. 

If you use the desktop version, go to the black stripe at the top of the program, click on online, and then select send tax file to agent. Let us know what the token number is.

@RACI625 
 

[RACI625]

Thank you for the quick response.

I'd rather not go down that path.

Think of nothing else impacting my tax return using turbo tax 2024 deluxe desktop version.

I have inherited and sold land in India in 2024. I have paid TDS taxes of 24% in India. Since India has a DTAA, I don't have to pay taxes on the sale in the US. I am a US Citizen living in the US.

I am inputting the sale of land in the wage and income section, under investments. Seems pretty straight forward. My issue is to input the taxes paid in India (TDS) under the Deductions and Credits section. Many layers that are pretty confusing. Once Inputted, I seem to be getting a refund from the sale of land and taxes I paid, that should not be the case, or at least I thought

[DaveF1006]

You can claim a foreign tax credit for the taxes you paid in India. Here is how to claim.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. When it asks We just need to check if you have any uncommon situations indicate I paid foreign taxes on income I earned while working in another country. 
6. At some point in the interview, it will ask if you wish to take a deduction or a credit. Take the credit.
7. Navigate and record the entries that the program asks for and when you reach the page that mentions Foreign Tax Credit Worksheet, this is where you take notice.
8. The first that you will be asked is what category of income is it, you will say Passive income.
9. Next screen will say Country Summary, select add a country 
10. When it says Other Gross Income - XXXX, Here you put in the Gross Amount you earned in that country. 
11. Then you will navigate through the screens until you come to a screen that says Foreign Taxes Paid - XXXX, here is where you record the amount paid under Foreign Taxes.
12. Finish out the section. 

@RACI625 

[RACI625]

Thank you again for your super fast response.

One more question. I've inputted everything as I believe is correct. India charges taxes on the full selling price of land (T.D.S). TDS rate was ~15% of selling price. US taxes on l.t. capital gains, therefore, way less taxes in US. However, I needed to pay the taxes in India.

On my tax return, I have shown proceeds of land sale and estimated fair market value at time of inheritance. The difference is the l.t capital gains that is taxed in the US. This amount is far less than the foreign taxes I have paid to India, again 15% of gross selling price. Once I've input all information and have taken the foreign tax credit, I have increased my refund substantially. Enough I took my federal taxes to 0. I could not even use all of the foreign tax credit, the remaining will be forwarded to next year. Does this seem right that I should receive a refund for foreign taxes paid in another country?

Also, the estimated fair market value. The land was inherited in 2022. The fair market value has grown in India roughly 20% to the time of sale. However in 2022, the rate was ~$74. The rate now is at ~$85. The fair market value I have shown is at the $74 exchange rate. This is the higher fair market value which lessens the capital gains I am showing on my tax return for l.t. tax calculations, is the correct?

Thanks,

[RACI625]

I'd greatly appreciate an answer to the question above.

grateful for this service, thank you all.

@Dave 

[DaveF1006]

Yes, both of these are correct. To  answer to question 1, if your only income reported is the sale of this property and if the foreign taxes you paid on it are significant, then your credit is correct. Foreign tax credit or FTC is based on a ratio whereas if you take the amount of foreign taxes and multiply it by (income from foreign sources / total income from all sources).  Here is how it works.

If your taxes were $50,000 taxed on a $400,000 sale, your FTC is ($50,000)($400,000/$400,000).  In this case, your FTC is $50,000.  Now let's assume, you have additional US income of $100,000. The FTC will calculate as follows: ($50,000)$400,000/$500,000).  In this case your FTC is $40,000 because of the added $100,000. 

The foreign tax credit is a non-refundable credit which will reduce the amount of tax liability to zero or closer to zero. Any excess is treated as a carryover.

In your second question, it depends on how India assessed your Fair Market Value at the time of inheritance. This does conform to the US standard that your Fair Market value is determined at the time of inheritance and not at the time of the sale. In this case, it would be shown at the $74 exchange rate.

[RACI625]

Hello again,

will turbo tax automatically file an FBAR Report for me or is this something I need to do separately?

[DaveF1006]

No this is something you need report separately but you can do this through the Turbo Tax program. The information that is entered in the return will be reported to the Financial Crimes network or FINCEN.  To report.

• Open your turbo Tax program
• Go to other Tax Situations
• Other Tax Forms
• Miscellaneous Tax Forms
• Prepare a Report on Foreign Financial Assets

[harrybig]

I have a similar problem - I sold property in India with cap gains of about $150K and I paid taxes in India of about $30K (effective rate of 20%). Now, if I enter the proceeds in the "Investment and Savings" section as 1099-B and enter the foreign tax in the foreign tax credit (Form 1116), my tax obligation goes up by around $8K which should not be the case if there's a dollar for dollar credit on the foreign taxes as the US rates are 15% for my tax bracket. Can someone please help me understand why I would need to pay additional taxes in the US for this transaction?

[DianeW777]

There is not a dollar for dollar credit for foreign tax paid on your return. The credit is limited to the amount the United States (US) would have charged on the same income, not what you paid in tax to India. However, there is good news. 

The foreign tax credit can be carried over or back depending on what you choose to do.

• Foreign tax credit can be carried back one year or carried forward up to 10 years so you want to keep track of your credits and which year is used. See Topic no. 856, Foreign tax credit.

1. Sign into your TurboTax account > Search (upper right) > type foreign tax credit > Click the Jump to.. link
2. Follow all the screen prompts and instruction to enter your information.
   1. Claiming the Foreign Tax Credit (Form 1116)

@harrybig 

[harrybig]

Thanks Diane for your response. I get it that the credit is limited to the amount US would have charged for the same income. That's why I am confused on why my taxes went up. Before entering my foreign cap gains and the credit, my taxes due are about $2K but after entering both the cap gains and the claimed credit, my taxes goes up to $10K! I don't expect a refund, but my taxes should not go up either as I have paid more than what US would have charged back in India @DianeW777 

[DianeW777]

If you would like to send us a “diagnostic” file that has your “numbers” but not your personal information it would help.  If you would like to do this, here are the instructions:  (Don't forget to give us the state)

TurboTax Online:

Open your return -Go to the menu panel on the left side of your return and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
5. Reply to this thread with your Token number and your state. This will allow us to open a copy of your return without seeing any personal information.  

TurboTax Desktop:

If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:

1. Click on Online in the top left menu of TurboTax CD/Download for Windows
2. Select 'Send Tax File to Agent'
3. Write down or send an image of your token number and state then place in this issue.
4. We can then review your exact scenario for a solution.
5. Please also tell us any states included in the return. This is necessary for us to view the return.

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution. 

@harrybig