Foreign LTCG and form 1116

[ws2024]

I sold a foreign investment property and had a long-term capital loss. Since I am a non-resident in that country, taxes were deducted by the buyer and paid to the country at the time of sale. I will get my refund when I file taxes in the foreign country next year, but since I have been using "cash basis" for reporting foreign taxes, I have shown taxes paid in my 1116.

1. Where and how do I report my long-term capital losses in 1116?

2. Will reporting this loss decrease my foreign tax credit?

Thanks in advance!

[DaveF1006 · Accepted solution]

First, you would report this as an investment sale.

1. log into your Turbo Tax Account. 
2. Go to Federal> Wages and income
3. Scroll down the screen until to come to the section “Investment Income”
4. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’  
5. 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)
6. Since you did not receive a 1099-B, answer “no” to the 1099-B question
7. Choose type of investment you sold - select everything else
8. What type of investment other
9. How did you receive the investment. Indicate you purchased it.
10. On what did did you receive this investment.  
11. Some basic information:
    1. Description –  Usually the address of the property sold
    2. Sales Proceeds –  The amount you received for the sale
    3. Date Sold – Date you sold the property
    4. Cost or other basis  (This is where you put the purchase price of the home)
12. If you had an investment loss, on the question of "Did you use this property for business or investment?" If the property was not used for any personal use (no family member lived in it or used it between the time of inheritance and the sale), you will answer that this was for investment. This will allow you to take a capital loss if you receive less than what you paid for it.

Now you income is reported, so now you may work on the foreign tax credit. As you begin working on the credit, the program will ask you what your gross foreign income is.  Here you will list the gross proceeds of the sale (not the net). Then a few screens later you will enter the foreign tax paid.

No, the capital loss will not decrease your foreign tax credit but it may limit the amount of credit you may receive for the year.  A foreign tax credit is a non-refundable credit that is limited by the amount of your tax liability for the year. The capital loss will reduce your tax liability for the year and may possibly limit your credit for the year to the amount of your tax liability. Any excess is a carryover that can carryover for the next ten years provided if you have foreign income to apply in those future years.