Sale of vacation home in foreign country

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. 

@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

Thank you both - that really helps!

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

How do you tell TT that this is foreign income?

@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. 

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. 

@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 )

Online version.

Thanks again.

@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 ?

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. 

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.

@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 .

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,

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!

@snwong79 ,  

1.    Please also read this page.  Because  US capital  gain  gets preferential  tax rate treatment , you will need to adjust the foreign source income ( i.e. the  amount that was taxed  by the foreign tax admin ) for computation of the  foreign tax credit  -- if you take credit. ---> https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-compliance-tips.

2.Note  that the US capital gain  ( long-term in your case ) may be different that that computed  by the  Foreign Tax admin --- for US it is  Basis ( acquisition Cost ) subtracted from  Sales  Proceeds ( which is Sales Price  less any sales expenses  including transfer taxes etc. ).  All this is  in US$ of the day --- and thus is another wrinkle to consider.

3. Ideally , one should wait to file the US tax return  ONLY after the foreign tax  amount has been finalized  as otherwise , one may have to file an amended US return .

4.  This is passive income unless you are actively involved in  this type of investment as a business

5.  While the foreign tax may be recognized  in full , the amount allowable for the year depends on a ratio of foreign income  to world income ( taxes on thereof  ). Un-allowed  foreign tax credit  can be carried  back one year  and  up to 10 years forward -- but the rub is that you must have foreign income in that year to use  the credit.   The deduction however  is limited  only by the  current  limit  on SALT  ( State And  Local Taxes)  --  hopefully this provision will, be repealed  soon.

Is there more I can do for you ?

Thank you!

So are you familiar with form 1116?  for 1a, it was asking for gross amount.  I was wondering if it meant the sale price/proceeds or the net gain (sale proceeds - cost)?

Philippines government taxed me based on the zoning price and not my sale price which is lower than the zoning price.  And I was surprised they didn't based it on the capital gains.

@snwong79  -- yes I am.

(a)  the gross foreign income for purposes of  form 1116 is the foreign income ( in your case  the gain  in your investment.

(b) if the Philippines tax is based on anything other than  income / gain  ( as you say -- zone where the property is ) then I would consider this as a form transfer tax and not capital gain --- thus  this tax should be  treated as an expense of the sales process --- this should  take away the need for  foreign tax credit , form 1116 and reduce your  capital gain.  And so all the adjustments etc. fall away.

Does this make sense ? 

Great, that makes sense.  I guess I got hung up with the wordings 'Capital Gain Tax' that was detailed from the receipt I got from the Bureau of Internal Revenue.  I had to pay $15K for that, I thought maybe I can recapture some of it through the Foreign Tax Credit.

Hi @pk ,

I'm just using this thread because I learned a lot thanks to you. Tomorrow is due, so I'm super nervous, but I'm trying to finalize my tax using TurboTax Online. My question is not about a vacation home, but it's an apartment unit  in South Korea, that I inherited on Nov 14, 2018 and I sold it on May 25, 2020. I heard that inherited property is considered as long-term gain (even if owning it less than 1 year), but I had it for about 1.5 years. I never lived there, and I didn't rent it out (there's some specific thing about it, but I'm simplifying this a little bit.)

I have 3 questions:

1. I was puzzled when I read your answers about "capital gain tax" or "transfer tax" can be used as sale  expense. In Korea, when someone sells a real estate property, they pay so-called "transfer tax" which is calculated based on the "gain" (i.e., sold price LESS acquired price). So I believe "capital gain tax" and "transfer tax" are the same thing in Korea. In my case, since it was inherited, the value of the property around Nov 14, 2018 was used as the cost-basis. Let's say I sold it at price $10,000, and cost basis was $7,000. And, in the sale process, brokerage fee was $200, and let's say I paid $800 to Korea's tax authority (let's say it's Korea's IRS). In this case, do you think I can use $800 as part of the expense? (Btw, I used the value $800 as the tax amount I paid to Korea, in Foreign Tax Credit interview screens (Form 1116). Here's an example that I entered in "Your investment sales" screen where you can report stock sales, etc.  In one of the line items there, I have these:

Brokerage: Good Morning Realty

Number of sales: 1

Proceeds from sales: 10,000

Cost basis from sales: 7,000

Adjustment: -1,000

Total gain or loss: 2,000

Does this seem correct, considering I put the sales expenses in adjustment? (1,000 was used because 200 + 800) Or am I not supposed to use 800 (tax that I paid to Korea's IRS) as expense here? (I think this will be put into Schedule D, I believe. Btw, I selected "I inherited" somewhere around this screen.)

2. I entered the information for Form 1116  (for Foreign Tax Credit) as much as possible, but there's one screen that I'm puzzled again. It's in the interview flow for Form 1116, and title of it is "Any foreign source qualified dividends or long term capital gains?" and small text reads: "Let us know how much of the income you reported for the following country was qualified dividends or long term capital gain income", and below that, it reads:

Country: Korea, South

Total foreign income for this category: 3,000

Foreign qualified dividends and l.t. capital gains: _________

I don't know if I should leave or enter 3,000 (because it was long term gain). When I tried entering 3,000 in the underline, my tax due increases (which is unfavorable) and I'm not sure if I was doing it correctly. (FYI, I don't have any other properties or assets other than this one that I sold last year.) And I used "Passive" category for this.

3. Also, do you think I can use TurboTax Online for this? In one of the screen, I saw the Help Modal titled "Form 1116 and Unusual Situations" and one of the bullet points was "Foreign taxes paid in foreign currency and you converted the amounts to U.S. dollars" and at the very bottom it says: "If any of these situations apply to you, you cannot use TurboTax Online to prepare your return". ===> I found this while I was meeting a CPA using TurboTax Online LIVE. The CPA suggested I should use Desktop version and I was trying Desktop version, but I found the desktop version was harder to use, and I couldn't find the screen that I could enter the info I mentioned in above #1. So, I'm trying to use Online version to file it, if it's okay.

Your advice would be greatly appreciated. Thank you!!

After asking around, I finished my filing. What I did could be wrong, but just wanted to share what I did. Let me answer to my own 3 questions above:

1. Using $800 in the adjustment is wrong. 

2. I should not enter anything in "Foreign qualified dividends and l.t. capital gains".

3. I used TurboTax Online to e-file my return.

Thank you!

@gl09602 , first  my humble apology  in not being able to help  you when needed help.  Please forgive.

Having gone through  your original post and the one covering how you actually filed, here is what I get:

1. You acquired  a capital asset ( an apartment ) through inheritance with a basis ( determined at the  time of passing  of the decedent )  of US$ 7000.

2. The asset was never used as income property 

3. The property was sold in 2020 for US$10,000

4. This  transaction   required a commission/ broker's fee of US$200 and attracted  a Korean Gains Tax of  US$800 .

5.  For US tax purposes ----  you sold a property   for a gain of US$2800  ( 10,000 LESS 7000 LESS sales expense of 200 ).  US will tax you for this gain as Capital gain since the property was held  long-term.  Since this was never an income property and no depreciation was allowable, there is recapture to consider.

6. Because you paid foreign taxes  on a passive income,  your options to claim this are  as follows ---

(a) use all US$800 as deduction  under  State & Local Tax -- SALT with a limit of 10,000 if you itemize;

(b) use form 1116 to claim  foreign tax credit -- foreign income US$ 3000, foreign Tax paid US$800.  Note that in this case the actual allowable  tax credit for 2020 would be essentially based on a ratio of  your foreign income ( 3000) and world income ( your US earnings + foreign earnings). Un-allowed  foreign tax credit can be used  back one year or forward 10 years  if and only if you have foreign income in those years.

(c) you claim foreign tax credit but use the  safe harbor rule ( not use form 1116 )-- declare  US300  if single filer  or $600 if filing joint. This will require no  ratio limitation but the amounts may be smaller. Ideally you may want to try this out  and see which of these three options gets you the best results.

6. I do believe  a desktop version  and the higher functioning ones like  "Home & Business" better suited  to this kind of  fairly complex returns.

In all of the above I am assuming that you are US citizen/Resident/Resident for tax purposes and that your tax home is USA

Again, I apologize  for  my absence.  If there is more I can do for you, please let me know ( PM gets my attention faster )

Stay safe

No worries, and thank you so much for your thorough message, @pk ! Absolutely amazing information. Really appreciated your attention to details. Take care–

Hi,

Reviving an old but good thread.  I am in similar situation where I sold an inherited property in France.  French IRS has automatically taken their share. It surprisingly wasn't too bad like maybe around 12% of the gain. Property was help 20 years.

I have entered the sale under income.  This made my owed amount in TT skyrocket by close to $10k.  
I am working on Entering the foreign tax credit (1116). I had read that it would offset my tax bill increase (the $10k) but it did not.  

Any idea where I may be mistaking?

Thank you! 

@Damocles , without knowing the  (a)  your  basis in the property for US purposes; (b) sales prices ; (c) your total gain in the property under US laws , etc.  I cannot answer if you are doing something wrong  or TurboTax is mis-handling something.

  Generally the form 1116, while recognizing the foreign tax  dollar for dollar, uses a ratio of foreign income  to World income to limit the foreign tax credit allowable  for the year in question.  The  suspended  foreign tax credit can be carried back one year or forward , provided  there is foreign income in those years.  It often becomes an asymptomatic curve -- never giving you whole amount but getting closer and closer ( if you have foreign income.

So please can you help by providing more details ref'd above and I will be happy to look  at and see what is going on.

pk