Sale of vacation home in foreign country

[um]

Hello,

2 years ago I bought a home in a foreign country to be used as a 2nd home for several months during the winter.  The purchase was not reported on Form 8938 as it was strictly personal use. (Answer on this forum: Foreign real estate is not a foreign financial asset required to be reported on Form 8938).

I just sold it the end of 2019 with a slight gain.

Based on other postings, it seems that I need to report the capital gain - is that correct?

I also read that I don't need to pay taxes on the gain on the State level, as this is a strictly foreign transaction (purchase and sales in foreign country). How is the gain excluded on the State level?

How detailed do I have to be entering the address? City and Country - or complete mailing address?

My tax situation requires that I am using TurboTax Premier.

Thank you for your help with these questions.

[MichaelL1]

You are correct in that a 2nd home is a capital gain to be reported.  Due to being held more than one year, it is a long term capital gain, which gets more favorable tax treatment.

As far as the state, goes, I am not sure where you read it does not get reported.  Your resident state will tax you on it, and if you paid taxes on the gain in another state you would get credit for it.

Resident states tax your income regardless of where earned, but in some cases a credit can be taken if taxes paid elsewhere.  In your case it does not appear that taxes were paid elsewhere. 

[pk]

@um , agreeing with @MichaelL1 , wish to add a few little items :  

 (a) your basis in the property is your acquisition cost  ( in US$ of the date ) + cost of all improvements ( in US$ of the time )

(b) your gain ( capital )  is the total sales price LESS sales expenses  ( commission, preparation cost, transfer tax,  title insurance or equivalent etc. etc. )  LESS  your basis.  You will have to convert all these  costs to US$ of the day ( bank rate  )

(c) if the local authorities tax the gain then that tax  needs to be allowed for -- (1) take foreign tax credit against the gross  proceeds as foreign source income or (2) deduction on your  return

(d) if the  net  proceeds from the sale rested in an foreign account , that you own or have signature authority over , this may require  FBAR  ( Fincen 114 on line reporting   or FATCA  ( IRS 8938 ) reporting

(e) Tell TurboTax that you have sold a second home  and it will do the needful ( except for the  FBAR  { Turbo does not handle this  }  or FATCA trigger -- you have to tell TurboTax that this is foreign source, which should then trigger foreign tax credit form 1116  )

(f) States generally tax you on your world income as indicated by the federal AGI -- so there may be reporting requirement for the sale -- depending on the state.  Note that many states do not recognize  foreign tax credit  ( as opposed to tax credit for another US State )

Hope this helps - if you have more questions on this please feel welcome to comment

[um]

Thank you both - that really helps!

And yes, TurboTax figured it all out once I entered the relevant details.

[chievolt]

How do you tell TT that this is foreign income?

[pk]

@chievolt , if the  foreign country does tax  this capital gain  with an income tax, then you will have to file a form 1116 --- you tell Turbotax that you have foreign  tax to report --- do a search for  "foreign tax credit" then jump  to the topic -- that should open up the  worksheet for the  foreign tax credit -- enter the category as passive --- follow though  with all the entries.  Make sure that  the foreign income associated with this  tax is recorded properly -- TurboTax may not have enough info to fill this  ( because  it only knows the capital gain based on the sale of property  but not that it is foreign ).  This should work.

If you need more on this , please  provide the following info (a) which country;  (b ) was the property ever rented out at fair rent ; (c) how did you acquire the prop etc. 

[chievolt]

Thank you very much for your response. You are correct TT is not recognizing the capital gain as foreign.

Bought the place in 2016 in Mexico. It is truly a 2nd/vacation home, not my primary residence. Have never rented it.   Sold it in 2019.  I paid capital gains taxes to the MX government. 

I entered it as Income/Investment/Sale of 2nd Home in TT. I did not see a way to tell TT that this was a foreign sale.

When I try to enter the "Foreign Tax Credit", it says that I have to create a foreign income first. This is where I am getting stuck.

Any assistance/guidance you can provide would be greatly appreciated.

Thanks. 

[pk]

@chievolt , are you using on-line or desktop version ?

Please answer --- I will come back to you tomorrow morning  (  PST ) with screen by screen ( espe. if you are using desktop version  but the on-line should be similar ( except that you  do not have access to the  underlying worksheets  in the on-line version )

[chievolt]

Online version.

Thanks again.

[pk]

@chievolt , here is what I did to achieve  the results expected  using desktop version -- so I could see the worksheets/forms being filled correctly ( but the on-line should be pretty much the same )

1. created a home sale -- main home  and then "did not use as my main home for two years" -- thus becoming second home  and the capital gain showed up.

2. went to search  window and searched for "foreign tax credit" -- jump to it ---now followed screen prompts for the next bunch of screens  making sure the  capital gain amount  was entered as the foreign  income  from the country ( established MX as the country ) and the actual taxes paid to Mexico --- form 1116 was filled out correctly and the  foreign tax credit computed and applied.  Also made sure that form 1040 did not add this foreign income reported  on 1116  as an additional income.  

3. Make sure  that the everything looks consistent --- it is  a bit contorted  but does work.

4. I think once you pay for the preparation of the return , the on-line version does allow you to see the forms  before you file -- please review to make sure  that things are good.

5. I don't know about Mexico  computation of capital gain -- just make sure to enter the Mexico Capital gain  amount ( Pesos converted to US$  ) and not the US computed capital gain -- I say this because some countries  index the  basis such that the gain ( at source country ) may be different than that in the USA ( because USA  does not  index the basis )

Does this answer your query ?

[chievolt]

Thanks, I will try it but I thought the Online version kept sending me back to income as soon as I try to enter the "Foreign Tax Credit" section. Seems it wants me to identify in the income section where I paid the foreign tax. Except it does not have a place for me to do that when I enter the sale as a capital investment. 

Will try again this evening.

Thanks again for your assistance. 

[FormerExPat]

I am hoping for some help on reporting the sale of a second home which was just a vacation home from 2002 to 2011 and was changed to a vacation rental in 2012 when we moved back to the USA.  We sold it in Jan 2020 and so it was a vacation rental from 2012 through the end of 2019.  TT wants the Sch E deleted now.  We had Sch E disallowed losses for 7 of the 8 years it was a rental which show as accumulated disallowed losses on the 2019 return.  How do I report this in TT Permier?  Do I split the sale details and cost basis details between Sch D/F8949 and F4797?  There is no capital gains tax on the property in the foreign country where it was sold but we lived there for 18 years so we also have some passive income and general income tax  credit carryover left as we paid higher taxes there than we would in the USA.  How does this get onto the F1116? I did not report depreciation on the house as the loss was disallowed without it but it looks like I will be taxed on it after the sale anyway.  Can the unreported depreciation on the house cost be added to the accumulated disallowed loss?  Thanks in advance.  Reading up on the relevant IRS publications but could use some help.

[pk]

@FormerExPat As I understand the situation :  (a) you converted your main home  in ( located  abroad) 2012  to rental property  ( I am assuming that  your  " personal use" days were less  than maximum allowed ); (b) you recognized the rental income, expenses and depreciation for the year 2012 through 2020; (c) because of your  AGI you were not able to take advantage of  losses  from schedule -E and therefore have accumulated  suspended losses for recognition  at disposal of the  income property;  (d) the rental property was disposed during 2020 thus triggering  gains/ loss   computation and so  form 4797, 8949 and schedule-D are  in effect;   (e) for some  reason Schedule-E has been deleted for the tax year 2020

Given the above ---  what I would expect to see is  1.  gains computation based on  sales proceeds ( Sales Price  LESS  sales expenses such as  commission, title transfer costs including transfer cost, legal costs etc. etc. ) LESS adjusted basis  (Acquisition basis  LESS accumulated depreciation allowable PLUS cost of improvements over the period of ownership etc. etc. ) LESS accumulated & suspended losses.   When  you tell TurboTax that you have  disposed off of income property, it should  open a 4797, onto 8949 and then to schedule-D.   The schedule-E should be a  done first and a separate item -- it should cover all the costs and allowable depreciation for the  year  ( till the date of disposal ).  Note all these  amounts are in US$ of the  day.  Also US does not index the basis  for computation of the gain/loss.

 If you want more on this please consider giving me some rough ( and fictitious figures ) so I can actually work out the scenario and see if the TubroTax is misbehaving somewhere .

[FormerExPat]

Thank you so much.  I am going to get together the figures you asked for in terms of where TT puts them using fictitious numbers. 

The only difference is it wasn't our primary home, just a second smaller vacation home before it became a rental since we moved back to the USA in late 2011 and only went back to visit the overseas home about 3x and stayed about 1 week each time between 2012 and 2019. 

I called it a vacation rental as it was only rented out a few days, 30-67 days, per year between 2012 and 2019.  We sold it, closed in late Jan 2020 and did not rent it out at all in January 2020 but I had to put in 1 day at FMV in TT as putting in a 0 resulted in Sch E deletion by TT with a message saying it needed to be deleted.

I may need to reimport the 2019 return and start over but will check to see if just putting 1 day rental works. 

Back with more data soon.  Thank you again,

[snwong79]

Hello,

I bought a presale home in the Philippines in 2014 thinking it will be my second or retirement home.  It took the builder 5 years to finish but I ended up selling it on Jan 2020 without living nor renting it out.  As I understood, I entered the transaction under Investments Income, Stock & Others.  I paid about $15,000 of Capital Gain Tax during this transaction in the Philippines.  This is where I am stuck now.

1)  I tried to add a foreign tax credit.  UPDATE, Yes, Yes .... so do I Itemized tax deduction or Take a Credit?

2)  Is this a passive income?

Any guidance going forward would be great.  

Much thanks!