Sale of foreign inherited property

[ExPatCat]

How should one report the sale of an inherited property located in the UK?

Capital gains tax has already been paid to the UK tax authorities, so does this affect US tax liability (I certainly hope so)?

Is there an allowance before any US taxes are owed? How is this calculated?

Thanks!

[AmyC]

You will enter the income, then you will enter the taxed paid to the UK.

Step 1, enter the income:

1. Go to income section 
2. click on Add More Income
3. scroll down to Investment Income
4. Show more
5. Stocks, Mutual Funds, Bonds, Other
6. Start:  Continue answering the questions.
   1. Yes,
   2. 1099-B - no,
   3. one sale at a time and the boxes appear for your entries.

Step 2, enter the tax already paid:

See Where do I enter the foreign tax credit (Form 1116) or deduction?  Note, you can try both options. The credit is most commonly used.

[ExPatCat]

I just found this great answer from 2019. I hope it is still valid :

If you are a US citizen or resident, you are required to file a US tax return for income from all sources both domestic and foreign. Therefore, you will need to report the 2015 sale of this Inherited home (converted into US dollars) on your tax return as the sale of a capital asset.

To know the actual amount of the capital gain or loss on this sale, you will need to know not only your sale's proceeds (in USD) but also your basis in this inherited property (in USD). Your basis in an inherited property is usually the Fair Market Value (FMV) at the time of inheritance plus any capital improvements made to the property since inheriting it (all in USD). Also remember that the sale of an inherited asset is always considered a long-term transaction (even if the asset was held for less than one year).

The Internal Revenue Service has no official exchange rate. In general, use the exchange rate prevailing (i.e., the spot rate) when you receive the property, made any capital improvements and sold the property. Please refer to the following IRS links for more information about Foreign Currency and Currency Exchange Rates and Yearly Average Currency Exchange Rates 

Click this link for further information about reporting the sale of a capital asset

To enter this transaction in TurboTax, log into your tax return and type "investment income (gains and losses)" in the search bar then select "jump to investment income (gains and losses)". TurboTax will guide you in entering this information (see step 6 below) 

Alternatively, To enter this transaction in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Personal Income" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on” (jump to full list)
4. Scroll down the screen until to come to the section “Investment Income”
5. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ (or “update” is you have already worked on this section)
6. The first screen will ask if you sold any investments during the current tax year (This includes any sale of real property held as an investment property so answer “yes” to this question)
7. Since you did not receive a 1099-B, answer “no” to the 1099-B question
8. Choose type of investment you sold - select everything else
9. Some basic information:
1. Description –  Usually the address of the property sold
2. Sales Proceeds – Net proceeds from the sale (reported in USD)
3. Date Sold – Date you sold the property
10. Tell us how you acquired the property - inheritance
11. Enter the date inherited
12. Enter the your fair market value - Fair Market Value of the property at the time of inheritance plus any capital improvements since inheriting it (in USD)
13. If you had a loss, on the question of "Did you use this property for business or investment?" If the inherited house was not used for any personal use (no family member lived in it or used it between the time of inheritance and the sale), you will answer that this was for investment (see screenshot).

Click IRS answers on Gifts and Inheritance for more information from the IRS on the sale of an inherited house

If you paid foreign taxes on the this transaction, you will be allowed an offset for these foreign taxes on your US tax return.  If you take a foreign tax credit, your US tax liability will be reduced by the amount of taxes that you would have paid if the transaction took place in the US (see this link Claim Foreign Tax Credit). If you take a foreign tax deduction on Schedule A, you will be allowed to deduct the full amount of the foreign taxes paid but you will need to itemize (which could limit your ability to take the full deduction). The TurboTax software will help you determine which of these options will lower your overall tax liability.

Currently the maximum capital gains rate in the US is 20%. Depending on your tax bracket, you may owe more than 20% due to such factors as Alternative Minimum Tax (AMT) and the additional Net Investment Income Tax (NIIT) of 3.8%

Please note : If you have foreign bank accounts, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR) if are a US citizen or resident and:

1. you had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2. the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

To be directed to the US Treasury Government Website to prepare a Report of Foreign Bank and Financial Accounts, click FBAR (TurboTax does not support this form)

[AmyC]

Yes, claim the income and the credit. You should use the Yearly Average Currency Exchange Rates | Internal Revenue Service .