Reporting Sale of an Inherited Property in India

[rajeshlhegde]

Hello,  My Mother passed away on 4/17/2023. The FMV of the house that I inherited at the time of her death based on US to INR exchange rate on that day come to be $77,000 (1 USD = Rs. 81.5).  The property was transferred officially to my name on 7/15/2024.  I sold the property on 12/8/2025 for $66,000  (calculated based on 1 USD = Rs.90.15 on that date). 
Based on the above, I am actually noticing a loss.  The FMV value of the property came down slightly  between the time of my mother's death and the eventual sale  (2.5 yrs later), but the USD to INR exchange rate played a factor as well (Rs. 81.5 in 2023 to 90.15 on 2025). 
Now, the confusing part is - When selling in India, I paid TDS (Tax on source, or Advance Long term gain tax)  to Indian Govt at 12.5% , which at the Rs.90.15 exchange rate comes to  $9425.  So, based on USD calculations, I see a loss , but in India I paid a LT CG tax (Which I also need to report somehow). 
Could someone here please check and tell me if I am doing this correctly?

[pk]

@rajeshlhegde  Namaste Rajesh ji

(a) I am assuming that your CA in India will try the  LTCG both ways i.e. 12.5% with no indexing and 20% with indexing.   This is because  the transaction under US tax laws is showing a loss.

(b) For US purposes, Foreign Tax credit that is allowable is lesser of actual foreign taxes paid  and that imposed by US on same doubly taxed income.  And in your particular case there is a loss and personal loss.  There is no US tax on this .

(c) TDS is not a good figure -- risk of need for amended return.  I would wait till the Indian ITR is finalized.

Does this make sense ?   Is there more I can do for you ?

If you need more on this you are welcome to add to this thread or PM me ( please NO PII -- Personally Identifiable Information ).

[rajeshlhegde]

Thank you, @pk ! 
Can you help me confirm is it valid- the loss that I am observing based on the Rupee depreciation between the FMV at the date of death of my Mother (from whom I inherited property) and the date of Sale? Because, one would likely expect a  increase in value in a 2-3 period, but its the USD-equiv value based on exchange rates on those dates that is driving this loss in my case.
Re: Filing tax in india - I have never filed tax in india before. So, I am not sure what does the 12.5% vs 20% mean.  I have to find a CA in India to discuss this.

[rajeshlhegde]

@pk, for the below that you noted, do you think the final tax that I would owe to the Indian Govt could be higher? I have only had very little income from India.
(c) TDS is not a good figure -- risk of need for amended return.  I would wait till the Indian ITR is finalized.

[pk]

@rajeshlhegde , 

1. if the prop was never used as income property during your holding period and therefore there is no depreciation to deal with, and the US filing shows a loss , there is NO US tax  since there is no positive foreign income to deal with.  Thus there is NO Foreign Tax Credit available for the  tax year.

2. I don't know what happens  if you have TDS but you never file a return  --  as in UK does it become final or what .  I suspect there is a small possibility that if  your CA  finds that  the older system of  indexed valuation and  tax at 20% reduces the  final tax, you reduce your overall tax situation  ( at the additional cost of CA filing  the return ). But note that no matter what you do there is no FTC --- so it is just any possible reduction in Indian tax outlay.

3. The  LTCG in India for real-estate  for years  had been indexed i.e. basis indexed by CPI and the  diff then taxed at 20% Cap Gain. The current  system is  like the US -- no indexing of basis and cap gain taxed at 12.5%.  But I though the transition period  is till 2025-2026 tax year.

4.  Also since your TDS was at 12.5%, there is probably not much chance of  ITR being different and the CA may be reluctant to spend time and try.  Plus there is no US FTC available.

Is there more I can do for you ?

Namaste ji

[rajeshlhegde]

Thanks again @pk for reviewing my questions.  You mentioned "But note that no matter what you do there is no FTC --- so it is just any possible reduction in Indian tax outlay."  ,  but following the suggestion from the community on how to get Foreign Tax Credit for the TDS that I paid for the Indian Govt, I am seeing a Tax Credit.  What could I be missing here?

Here is how to claim your foreign tax credit in TurboTax.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5.  As you go through the screens, when it asks "Tell Us About Your Foreign Taxes" select none of these apply.
6. When it asks if you wish to take the deduction and credit, take the credit.
7. Continue through until you reach a screen that says "No other income or expenses" Say no
8. Continue through until it asks the income type, say Passive Income
9. Next add a country pick India
10. Other Gross Income say Sale of Personal Property and the Gross Amount of the sale
11. Continue through the interview until it asks for the foreign taxes you paid, here record the amount.  
12. Now you are done reporting the foreign taxes. Just keep going through the section without making any more entries. You will have finished reporting your gross income from the sale and the foreign taxes paid.

[pk]

@rajeshlhegde , Namaste  Rajesh ji

While I see what path you have followed to declare/ recognize the foreign taxes paid , what did you decalre as foreign source income ?    Because it is not the sales price --- the only foreign source income that is being taxed by the USA is the net  LTCG per US tax rules.  I am missing something here

pk

[rajeshlhegde]

Since I am a US Citizen, I don't have a foreign source income in India other than interest income in Rupees from a deposit account. I have noted that amount in the worksheet for Foreign tax credit.

[pk]

@rajeshlhegde , oh sure that foreign source income and the Indian Tax on it should still work --- or are you saying because  you have foreign source income --- say Interest income  US$200, and  Indian tax on this being  say US$20 , you can then use this  residual foreign source income ( the  House sale  resulting in NIL US taxes ) to then claim  foreign tax credit for  Indian Taxes on the interest income ( US$20 )  plus  that on the sale on he house ( say  US$3000 ) ?   I don't think that is a valid  under the law .  But of course it is your choice a to what and how you claim.

Namaste ji

pk