Sale of foreign inherited property (India)

[patnaik]

Hello, I am quite confused as to how to report the sale of foreign inherited property. I am using TurboTax Deluxe and Easy Step.

1. I inherited a property in India in Feb 2023 with fair market value of $180K, converting from Indian Rupees to USD as of that date.
2. I sold the property in July 2024 for $182K, converting from Indian Rupees to USD as of that date.
3. I paid Indian capital gains taxes in July 2024 of $39K. (India charges capital gains from time of acquisition of the property by the original owner, not from when the property was inherited, unlike the US.)

I would like some step-by-step instructions on how to all enter this. I think I figured out how to report the sale of inherited property, but there was not a place to indicate that this was a foreign property. I tried to claim a foreign tax credit, but that whole section proved too confusing for me. Thanks in advance for your help.

[pk]

@patnaik , Namaste Patnaik ji.

  Just to be sure that I understand the situation:

(a) You a US person ( citizen/GreenCard/ Resident for Tax purposes )  inherited  a property  in India  in 2023 with a FMV of  US$180,000

(b) You disposed of this  asset  in 2024  for  sales price of  US$182,000..   Is this the   net amount i.e.  Sales price LESS sales Expenses  ( like commission. transfer tax, any repairs etc. done for purposes of selling etc. etc. ) ?

(c) You paid  US$ 39,000 as capital gains tax ( TDS ? ).  Thought India uses a flat 20% TDS and uses indexing (but  no step-up)  of basis ).  Surely your India  tax return is not filed yet for 2024/2025 tax year.  This will not get settled  still for a while -- no ?

General suggestion would be  to not file your US tax return  ( but go ahead and pay-in any tax liability ) till later in the year when the Indian tax is finalized.  Else file now  based on   TDS  and  come back and amend the return when  Indian taxes are settled/finalized.

As far as  foreign tax credit,  generally  and per  US-India Tax Treaty,  while US will recognize  dollar for dollar what has been paid/settled with India,  the allowable credit , for the year ,is always the lower of  amount paid to India  and what US taxes on the same income ( double taxation mitigation clause  ).  Thus  given the step up  value, your capital gain tax in the US is bound to be far ,lower than that  you paid in India.

Also note that  there is no area in TurboTax ( or  US tax ) where a distinction is made  between assets  disposed of in the USA or abroad.

You are welcome to tell me more  ( either here on the public board or PM  ) and I will do all I can to help you file a correct return.

Note that for this type of reasonably complex  returns , my  preference is to use Windows download "Home & Business".

Also note that if the proceeds  stayed in any foreign ban account ( in India ) for any length of time you are subject to FBAR and FATCA regs..

Is there more I can do for you.

Namaste ji

pk

[patnaik]

PK,

Thank you for your prompt response.  To clarify: a) I am a US citizen, b) 184K was sale price and I paid 1% commission on top of this. All other expenses were borne by the buyer. c) I paid TDS, but my CA in India has determined the actual  LTCG tax due to be 39K.  Indian taxes will be filed in May.

I can file for an extension, but my understanding is that tax is due anyway by April 15 and I need to ensure that I do not underpay. Hence I need to have a very accurate estimate of the tax due.

I will be filing FBAR as I have been doing all along. The proceeds from the sale (less TDS) were in my bank account in India for less than a week.

BTW, the LTCG tax rate in India changed recently (7/23/24) to 12.5% + cess and no more indexing.

I am looking forward to any assistance.

[DaveF1006]

You would file your return with the information that you have on hand now. If there are taxes due based on the return you file, you pay the taxes due on April 15.  If you have a tax refund showing on your return, you wouldn't pay anything.  you would just file your extension.

At this point, you would not be concerned about the tax rate in India. This will come in handy when you are assessed a foreign tax in India and if you wish to claim a foreign tax credit for the taxes you paid in India on your sale of property.

@patnaik 

[patnaik]

Dave,

I will have tax due so I will have to pay by April 15.  I am concerned about the tax I paid in India as I do want to claim the maximum allowable foreign tax credit to reduce this tax due as much as possible.

[DaveF1006]

Yes, you can claim a foreign tax credit for the taxes you paid in India. Here is how to report it.

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. If you are able to itemize deductions, you may consider taking the deduction.
7. There will be questions in the next screen asking you the description of the Foreign Taxes paid and the amount.
8. If you find that this has no effect on your tax return, you may circle-back and choose you wish to take a credit.
9. 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.
10. The first that you will be asked is what category of income is it, you will say Passive income.
11. Next screen will say Country Summary, select add a country 
12. When it says Other Gross Income - XXXX, Here you put in the Gross Amount you earned in that country. 
13. 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.
14. Finish out the section. 

[patnaik]

Dave,  thanks for your detailed response.  You lost me at item 12.  What exactly is Gross Income?  Is that the sale price or capital gains US or capital gains India?  (The two are different, with the Indian capital gains much larger.)  What do I do with expenses I incurred during the sale?  There are other questions that follow regarding capital gains and about expenses.  This exactly the spot I got confused when I tried filling this section out. Thanks for your help.

[pk]

@patnaik , thank you for the answers you provided.

Generally agreeing with my colleague @DaveF1006   on the content and the detailed instructions.

Now :

(a) you are correct , I was not aware of the changes exactly promulgated   as of 07/23/2024.  But my information  ( on-line journals etc. not IT site ) is that  the taxpayer can choose to apply the 20% tax with indexation of 12.5% without indexation.  Therefore your  Chartered Accountant found the path chosen to be more tax efficient.

(b) AS I have mentioned  your foreign tax credit -- the allowable portion is going to be at most  the US capital gain tax on the same  foreign income -- because of double taxation clause  in the  US-India Tax treaty.  Thus  no matter what the Indian Tax burden settles down to be ,  the  US tax computed on Schedule-D tax worksheet is all the benefit you are going to get. 

(c) For US tax purposes and based on figures you have provided   ---  Basis  in the asset  US$180,000 and the  sales proceeds being  99% of US$184,000 -- the gain would be  US$ 182,xxx - US$ 180,000 = approx. US$2000.. Thus your capital gain tax at the highest bracket is no more 25%  =  US$500..

(d)Given the above , I think you perhaps need to get your CA to work out the Indian tax  using both ways and see which benefits you most.   I say this because of all the  similar  situations that I have seen here over the years,   all using 20% TDS and  indexing, has never fared this  badly.

(e) Note that while the allowed foreign tax credit is only a portion, the rest is banked and can be  carried back one year or forward for a numb er of years.  But using it would require foreign income and foreign .  Limitation regime  of form 1116.

 Please note the requirements of FBAR  ( you have been diligent about it ) and also FATCA  ( because of the amount that rested in your bank account > US$ 100,000 ).

Is there more I can do for you?

Namaste  ji

pk