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 · Accepted solution]

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 · Accepted solution]

@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

[patnaik]

PK, thank you once again.  I think I now understand the concept. Dave has given some detailed directions, but I am still unsure as to what to enter where.  Your guidance is appreciated.

I will ask my CA run the calculation using 20% with indexation as well.  Thanks for the tip.

[pk]

@patnaik , 

are you on a windows machine and if so which version ?   I have Home & Business.

 You can PM me if you want more help -- yes ?

[DefLepp]

Namaste @pk ,

I wanted to know how does high tax kick-out work when claiming foreign tax credit in form 1116? India uses cost basis as parent's very old purchase date resulting in significantly higher capital gains (and correspondingly higher taxes), but per US rules if this capital gains (between sales date and inheritance date) is only $10K, does this mean I can claim only $2K credit (using max rate of 20% LTCG) from the approximately $75K taxes paid in India? Is the rest of the foreign tax paid recoverable at all (for example, carried back or forward)? And under which category do I report this property sale? I tried to follow the quoted instructions below in 'High Tax Kickout Adjustment' but it's not clear to me if I need to do this (or are these steps automatically taken by TurboTax on my behalf, after I fill out 'Taxes reclassified under high tax kickout' entry as -$73K?) in form 1116. Thanks in advance for your kind assistance!

"The income is first reported as passive income from its country of origin, but then it is reported two more times. Any income that is high-taxed will be reported a second time as passive income, but as a negative amount and under the country name of "HTKO". Then the income will be reported a third time, this time as the category it's been reclassified as. The taxes paid will be reported with passive category income, and then entered as a negative amount for "high-tax kickout" income with passive category income. The other category of income will have the taxes reported as a positive amount for "high-tax kickout".

[pk]

@DefLepp , thank you for reaching out to me.  Perhaps you should consider using PM  ( this is hidden from  public view but you cannot provide any PII -- Personally Identifiable  Information).

(a)  First  -- as I understand  Sitaraman is moving  India  away from basis indexation. So there is still a transition period when   both the  12-1/2 % with no indexation and 20% with indexation of basis  is allowed ( for  LTCG on Real-Estate alienation ).  If your particular  case is  inheritance based , perhaps you should get your CPA in India to look at the taxes due both way to see which is more beneficial.

(b) Second -- HTKO is really a punitive measure -- trying to prevent taxpayers from using  Foreign High Tax paid LTCG to reduce loss/gain from other "normal" LTCG situations.  Thus  , high tax kick out requires  Foreign Taxes  and income to be treated as "general income", thereby taxing this as ordinary/ active  income ( at taxpayer's marginal rather than Capital Gains  or similar passive income rate ).

(c) Since India's highest  LTCG with indexation  rate is 20% , and USA highest LTCG rate is 28%,  HTKO is not applicable for your particular case.

(d) The Tax treaty between US and India  to avoid / mitigate double taxation requires  US to recognize the full foreign taxes paid  (to India in your case ) but the allowable FTC for the year is the lesser of  actual paid to  the foreign country ( India ) and that imposed by US .  The rest of the FTC is carried forward ( 10 years )   OR  backward (1 year ).

My ref. for this is  26 USC 904 and specifically  26 USC 904.(d).(2).(F) and similar

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

Namaste  DefLepp  ji 

pk

[DefLepp]

Thank you so much for your reply @pk ji!Thanks for clarifying that HTKO does not apply in my situation.

[DefLepp]

Hi @pk , thank you again for confirming HTKO does not apply in my situation. One lingering question I have on your point d) is why does US allow full FTC to be claimed (even if it is potenitally spread out 1 year back or 10 years forward) on the much higher ($75K) capital gains income in India, when per US rules the capital gains income (due to high fair market value/cost basis on inhertiance date) is only $10K?

Thanks in advance for your clarification! Best regards.

[pk]

@DefLepp 

1.  Under  treaty article covering  " elimination of double taxation", US has to recognize the  taxes paid to a foreign taxing authority ( generally in full ).  However, US can only allow negation of its taxes on the same doubly taxed  foreign sourced income.   Also because of different tax laws , " doubly taxed foreign source income"  can become an issue.

2. Thus to meet its own rules and also abide by the  treaty, US recognizes the full amount of taxes paid on the foreign source income and allows ONLY its allocated taxes as credit for the current  year. Then it allows  the rest  ( unused Foreign Tax Credit)  to used  as carry back and forward   ( similar to other credits like NOL)

3. US also protects itself from " abuse" by using HTKO regime i.e. shifting  highly taxed  passive income  to general category income  and  its taxing rules.

4. Given India's availability of  "indexing of basis " or "Non-indexed basis"   and USA allowing only  FMV at death and at sale, I do not understand how you end up with such a large differential  ( US gain US$10K and India  gain US$75K).  I am missing something here, even allowing for currency differential over  ?? years.  Please could you clarify ?

Does this answer your query?   Is there more  can do for you ?