Sale of vacation home in foreign country

[pk]

@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 is limited  only by the  current  limit  on SALT  ( State And  Local Taxes)  --  hopefully this provision will, be repealed  soon.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 ?

[snwong79]

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.

[pk]

@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 ? 

[snwong79]

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.

[gl09602]

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!!

[gl09602]

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!

[pk]

@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

[gl09602]

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

[Damocles]

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! 

[pk]

@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

[Rosangelina]

<Hi, I have the same situation, bought a vacation home in a foreign country in 2019, and sold in 2022 with a gain.  I live in Europe.  I am now starting to do my 2022 return, with Turbo Tax for the first time.  Where do I enter the information about this vacation house sale?  Is this considered BUSINESS?  I am not familiar with all the steps at Turbo Tax and do not want to miss that page, and have to go back later to enter all the numbers.  Many thanks.

[Damocles]

I am sorry. It was getting so complex that I had to have an experienced CPA handle it. All the best.