Income Taxes Withheld and Sales Expenses for Inherited House in Foreign Country

[JackSpaniel]

I sold an inherited house in a foreign country that was unoccupied for 1 1/2 years between the parent's death and sale.  I got an appraisal done to get the FMV on deceased's date of death.  This came at around $150K (just to use round numbers as an example).  I paid all utility bills and house taxes for the 1 1/2 year period.  I spent money traveling to the foreign country and I sold the house for a selling price of $50K at a significant loss just to get rid of it.  However, I only received $35K at sale, $15K worth of foreign income taxes in that country were deducted at source.  I have entered the following so far in the Investment Income EasyStep:

I have the following questions:

1. For proceeds, should I enter $50K (selling price) or $35K (actual amount received)?  If I enter $50K, how do I claim credit for the $15K in foreign income taxes paid (if this is even possible in my situation)?
2. Where can I find what sales expenses are deductible? I found IRS publications explaining deductible sales expenses for your own house and rental property but less clear to me what is deductible for inherited property.  Any links appreciated.  More specifically, which of the following are deductible: travel (tickets, lodging, boarding, local transportation), utilities for the 1 1/2 years, house taxes, appraisal to get FMV?

Thank you so much in advance for your help!  I have received awesome answers here, I'm sure you'll help me get through this as well.

[DaveF1006]

For the taxes paid to other countries, you would need to fill out the Foreign Tax Credit section of the return. This section is different from the investment section where you reported the sale. I will list the steps at the bottom of this response.

For the first question, you will enter $50K for the amount of proceeds. As I mentioned, a foreign tax credit will be applied when you complete the foreign tax section on your return. 

When you sell an inherited house, the tax rules combine aspects of both investment property and capital asset guidelines are the same, no matter where the house is. The key to your question is distinguishing between Expenses of Sale and Holding Costs. 

For example, your appraisal for FMV purposes, improvements, and selling costs are added to the basis of your house to reduce its capital gains. Any travel expenses, utilities, house taxes, lodging, boarding, and local transportation aren't. 

You are eligible for a foreign tax credit or an itemized deduction for the taxes paid.  Here is how to report in TurboTax.

1. Go to Federal
2. Go to Deductions & Credits.
3. Scroll down to Estimates and Other Taxes Paid.
4. Click Start/Revisit next to Foreign Taxes.
5. Begin filling out the section. When it asks you for the type of income, indicate it is passive income.

Here are some links that will prove helpful to you.

IRS Publication 551: See the section "Property Acquired from a Decedent."

IRS Publication 550: See "Capital Gains and Losses" for how to report the sale.

IRS Publication 523: While this is for primary homes, the "Selling Expenses" list on page 12 is a great checklist for what you can subtract from your sale price.

As I mentioned before, the reporting rules are the same no matter where the property is located. even on foreign soil. Aslo uncheck the box that says you have more information to report. You have no more information to report in the remainder of that section other than the information you have already recorded.

[JackSpaniel]

I have three different types of foreign taxes I paid last year.  The ones reported on 1099-DIV ($1,000), ones reported on a foreign equivalent of 1099-INT ($500), and then the foreign taxes withheld on sale of the money losing inherited property ($15,000) (I have a 1099-S equivalent documentation from the foreign country for this sale.)  

First:

Please confirm this is all PASSIVE CATEGORY INCOME.  I don't see how the inherited house sale is GENERAL CATEGORY INCOME based on 1116 instructions.

Second:

When answering interview questions regarding the foreign tax credit, the 1099-DIV and pretend 1099-INT info carries over into 1116 automatically.  However, for the sale of the house, which I have already reported on 8949, the capital loss information obviously does NOT carry into 1116.  I can add $15,000 under passive income category for that country as other foreign taxes paid.  However, my question is this: do I need to add the capital loss information of $100,000 from 8949 for inherited house sale manually into the following 1116 interview question (see below)?  This results in a complete inability to claim any foreign tax credit this year, with a carry over into 10 years which I will not even use a fraction of as I am closing the bank account in the foreign country (done there) and my 1099-DIV foreign taxes are small year to year.  I know I have the option of deduction vs. credit, but first I need to know the answer to my question so I am thinking about this correctly.

@DaveF1006 

@ReneV4 

@AbrahamT 

[DaveF1006]

Yes, this is all considered Passive Category Income. Also,  you must include that $100,000 of foreign loss in your Form 1116 calculation, even if it means you can't use the credit this year. 

Your Foreign Tax Credit is limited by a ratio.  That ratio is (Foreign Taxable Income) /(Worldwide taxable income) X US Tax Liability.  The problem is if you have $1500 of passive income from dividends but a $100,000 capital loss from the house in the same category, your net foreign source income for that category becomes zero (or negative). When the numerator of that fraction is zero, your allowable credit for the year is zero.

You can claim the foreign taxes as an itemized deduction on your return, as this may add some relief to your tax situation. This depends on whether your itemized deductions are more than your standard deduction for the year. If they are not, it may not make a difference.

@JackSpaniel 

[JackSpaniel]

@DaveF1006 

Thank you very much.  I still have questions:

1. Is the sale of inherited real estate in a foreign country considered "foreign source income" or is it US source income?

2. Assuming answer is yes.  For 1099-INT and 1099-DIV, there are fields available to indicate foreign taxes paid and this information transfers automatically into 1116.  However, for the 1099-S (foreign equivalent), there is no field available for foreign taxes paid.  It is easy to report the sale details (and loss or gain) in the Investments section which populates 8949 in a matter of seconds.  When going to Deductions and Credits section and starting the Foreign Tax interview, I see there are two pre-populated columns: RIC and xxx Country.  The xxx Country is where the 1099-INT is from, and RIC is due to the 1099-DIV.  Please guide me step by step how to go through the interview for the sale of the inherited real estate.  It is also in xxx Country.  Please provide an answer that is good irrespective of whether it is a gain or a loss - let's assume for this question I want to pursue the credit option, not the deduction.  Please assume the following numbers:

Cost Basis: $p

Sale Proceeds: $q

Selling Expenses: $r

Foreign Tax Withheld: $s

Date of death: June 30, 2024

Date of sale: July 31, 2025

Please also note that the inherited property sale is considered Long Term Gain (or Loss), so the US taxation for it is favorable compared to 1099-INT taxes.

Thanks so much once again.

[DaveF1006]

Yes, this is foreign-sourced income. Here is how you will complete reporting the Foreign Tax Credit. I assume you have already reported this as income because we addressed that earlier. Now you need to fill form 1116 to receive your credit. 

TurboTax doesn't save this portion into the Form 1116 like it does for Dividends and interest, so you need to manually record this in the Foreign Tax Credit section.

As you navigate through the foreign tax credit section, your dividend and interest information is already reported. You need to report the sale of the house and report the gross amount of the proceeds..

1. Go to Deductions & Credits 
2. Estimates and Other Taxes Paid > Foreign Tax Credit.
3. Follow the prompts 
4. It will first ask you to report the income for the dividends and interest. In this case, you just need to check a box next to the dividends and interest to record the income.
5. After this is done.  There should be two country summary screens.
6. When you get to country summary screen, select edit next to the country XX that reported the interest. 
7. Here it will ask you to report other Gross income XXX.  You will report the Gross proceeds from the sale.
8. Don't enter anything for expenses.
9. Continue through the screen until it asks you to enter foreign taxes. Here you will enter foreign taxes on other income.
10. Finish out the interview screen until you are done.

[JackSpaniel]

I am not yet sure whether the above approach makes 8949 and 1116 consistent.  Let's work with specific numbers:

Sale Price was $50K

Taxes Withheld on Sale $15K

FMV on Deceased Death $150K

Expenses Definitely Related to Sale $50 (appraisal to establish FMV)

In this email, I first want to make sure 8949 is correct, then depending on the response, I will get to 1116 in the following email.

Proceeds: Should this be $50K or $35K?  In my bank, $35K was deposited but deed says sale price was $50K

Cost Basis: This is easy, $150K

Adjustment to Gain or Loss, $50

Thanks.

@DaveF1006 

[DaveF1006]

You will enter $50,000 as the amount of Gross proceeds. Taxes are reported separately on Form 1116 so that you can receive the foreign tax credit.

For your Form 8949 and Form 1116 (Foreign Tax Credit) to line up, be sure to report the “Gross” amount on Form 8949. If you enter the “Net” amount (what you received in your bank account), you’ll end up counting the tax twice—as both a reduction in income and a credit—which isn’t allowed by the IRS.

[JackSpaniel]

@DaveF1006 

Thanks for clarifying how to fill out 8949 correctly.  I am taking itemized deductions as opposed to standard.

If I take all of the foreign taxes as a deduction as opposed to a credit, they go on Line 6 of Schedule A.

Is it possible to take foreign tax credit on 1116 for the 1099-DIV and 1099-INT and take foreign tax deduction on Line 6 of Schedule A for the $15K held at source for the house sale?

I have read 1116 instructions and Pub 514 and normally you take either a deduction or a credit for all foreign taxes for that year.  However, exceptions apply where you can mix and match in situations where part of the foreign taxes are disallowed as a credit due to certain reasons, in which case you can take those taxes as a deduction.  Clearly the $15K is on a long term loss ($50K sale proceeds - $150K basis).  Publication 514 mentions one such reason (Covered Asset Acquisition) where the credit may be disallowed and then it can be taken as a deduction.   It appears to me this applies to the inherited home sale because for US there is a stepped up cost basis while not so for the foreign country.  

Please let me know if this will work.  The problem is I cannot understand the referenced material: Section 901(m) and the referenced Treasury Decision. Filling out the Turbo Tax 1116 for the 1099-DIV and 1099-INT credit and Schedule A Worksheet for the $15K deduction are easy - I just need to confirm this is okay.

[DaveF1006]

Yes, it is possible to mix and match your foreign taxes. IRS Publication 514 says you must choose to take a credit or a deduction for all foreign taxes you pay in a year. However, you can mix them if specific taxes aren't eligible for the credit. You cannot take a credit and a deduction for the same tax. 

Since you have the TurboTax software, go to your forms mode and select Schedule A. Go to line 6 and enter "Foreign Income Taxes on income not creditable due to U.S. loss." and then the amount. This will now become an itemized deduction." 

The basis for this is found under "Exceptions for foreign taxes not allowed as a credit." It identifies Section 901(m) as the legal anchor for your situation. The text specifically states:"You paid or accrued taxes on income or gain in connection with a covered asset acquisition. Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U.S. tax purposes"

For the IRS, a "Covered Asset Acquisition" (CAA) is a technical term for a transaction where the U.S. and a foreign country disagree on the value (basis) of an asset.

1. The Basis Step-Up: When you inherited the home, the U.S. gave you a "stepped-up basis" to its Fair Market Value ($150,000) under Section 1014.
2. The Foreign Disparity: The foreign country likely ignored this death-time reset and calculated your tax based on a much lower "carryover basis" (what your father originally paid).
3. The "Disqualified" Portion: Section 901(m) says that because the foreign country is taxing "income" that the U.S. doesn't even recognize (the difference between your $50k sale and the $150k basis), that portion of the tax is disallowed as a credit.

The Resulting Deduction: Because the tax is "not allowed as a credit" under this specific rule, Pub 514 grants you the exception to deduct it on Schedule A, even if you are taking the credit for other things, like your dividends.

[JackSpaniel]

@DaveF1006 

Thank you! 

1099-DIV is RIC income for 1114.

1099-INT is Country X income for 1114.

Inherited House Sale was in Country X too.

Two questions:

1. In Turbotax, what should go on the "Description of Property" - 8949 Part II Line 1 (a) .  Should I put "Foreign Income Taxes on income not creditable due to U.S. loss" for Schedule A Line 6 or more country specific language?

2.  Do you have a link for an easily readable version of Section 901(m)?  

Country X withheld income taxes as a flat % of the inherited property sales price without any regard to cost basis (original or stepped up).  That's the rule there.

[JackSpaniel]

@DaveF1006 

Thank you! 

Couple more questions on this, with the following background:

• 1099-DIV income is from RIC for form 1114
• 1099-INT income is from Country X for 1114
• Inherited House Sale (at a significant loss for US purposes) was in Country X too.

1. In Turbotax, what should go on the "Description of Property" - 8949 Part II Line 1 (a) ? 
2. In Turbotax for Schedule A Line 6, should I put what you suggested earlier: "Foreign Income Taxes on income not creditable due to U.S. loss" or more country X specific language given that both the 1099-INT and inherited house sale were in the same country?

You are correct, country X withheld income taxes as a flat % of the inherited property sales price without ANY regard to cost basis (original or stepped up).  That's the rule there.

Thanks!

[DaveF1006]

 After researching this more in depth, the tax that was charged on the basis of the house was an inheritance tax and not a foreign income tax based on the sale.  If this was the case, you cannot claim a foreign tax credit or deduction for inheritance tax. 

The key caveat here is that the Foreign country did not tax on INCOME but on INHERITANCE. If they would have taxed on income, they would have taxed on the proceeds and not the basis.

My apologies for the advice I gave you earlier. 

[ Edited 02/17/2026 I 7;00am PST]

[JackSpaniel]

@DaveF1006 

NO!  The foreign country charged INCOME TAX ($15K) on the gross proceeds of the sale amount ($50K).  Their was no inheritance tax or cost basis involved.  They charge a % of the sale amount as income tax.  Everything we discussed was correct.

I have carefully reviewed our Q&A in this thread and realized I did not explore the option of taking the house sale foreign tax as a credit per your instructions from above in a previous reply (reproduced below in italicized font):

"As you navigate through the foreign tax credit section, your dividend and interest information is already reported. You need to report the sale of the house and report the gross amount of the proceeds..

1. Go to Deductions & Credits 
2. Estimates and Other Taxes Paid > Foreign Tax Credit.
3. Follow the prompts 
4. It will first ask you to report the income for the dividends and interest. In this case, you just need to check a box next to the dividends and interest to record the income.
5. After this is done.  There should be two country summary screens.
6. When you get to country summary screen, select edit next to the country XX that reported the interest. 
7. Here it will ask you to report other Gross income XXX.  You will report the Gross proceeds from the sale.
8. Don't enter anything for expenses.
9. Continue through the screen until it asks you to enter foreign taxes. Here you will enter foreign taxes on other income.
10. Finish out the interview screen until you are done."

It turns out if I report the gross proceeds from the sale of the inherited house per these instructions, I can take ALL of the foreign taxes paid, including ones reported on 1099-INT and 1099-DIV, as credit and in that case do not need to itemize the house sale foreign taxes as a deduction.  This would result in the most favorable tax outcome, as you can well imagine.

If I do what you suggest above, in Turbotax interview for France's Passive Income piece of 1116, I input:

Then I don't enter anything for expenses or losses as you suggested:

The first part of resulting 1116 looks like the following.  The $600 in France's 1099-INT income and $500 itemized deductions are US personal property taxes.

and

Then I enter income taxes withheld on the house sale as you had indicated earlier:

This results in FULL credit of foreign taxes, where the house sale proceeds are treated as ORDINARY INCOME (not long term or qualified gains), 100% consistent with the treatment by France.

The MISTAKE I was making is that I was entering $100,000 of ordinary losses on this income (and $50 ordinary expenses, although that is less important) to be consistent with the US TREATMENT of this sale per 8949.  If I do so, then the following is what I see.  First picture shows the $50 expense for appraisal per 8949 and the second picture shows the $100,000 loss per 8949 ($50K sale price - $150K basis).

This results in modifications to the 1116 shown above.  Note the changes on Lines 2 and 5.

This results in complete inability to take ANY foreign tax credit and all of it is carried forward which I will never be able to utilize.

SO the key difference between the two approaches is whether I treat the foreign proceeds from the sale of the inherited house as ordinary income, consistent with your instructions and 100% consistent with the foreign country's treatment of those proceeds, or do I treat the foreign proceeds from the sale of the inherited house as a short term capital loss (there is no provision in 1116 for a long term capital loss) along with expenses?

This question is key and your help will once again be much appreciated!  I've taken a whole day to draft this reply, your careful review will be very valuable, please DM me or post a reply here if any more clarifications are needed.

[JackSpaniel]

@DaveF1006 And as a reminder, for the sale of the foreign inherited house:

sale proceeds = $50K

income taxes withheld at source = $15K

appraisal = $50

(US stepped up cost basis = $150K but the foreign country did not care about ANY cost basis).