Selling/reporting foreign real estate

[circle11]

I am in the process of selling my apartment in the Eastern Europe that I've owned since 2003. It was used strictly for personal use (i.e. no rental income or anything of that nature). It now costs more than it did 20 years ago but for the obvious reason it is very hard to compare current prices and prices back then. Plus, I've invested a lot of money into renovation over the years, no receipts kept. 

I am planning to sell it and transfer funds to my US account. Do I need to report this kind of sale in any way on my 1040? Can any portion of the proceeds be taxable? Thanks in advance!

[rjs]

Yes, you have to report the sale on your U.S. tax return. The portion of the proceeds that will be taxable is the gain, or profit. The gain is the selling price minus your basis. Your basis is the amount that you paid for the apartment plus the cost of any improvements (but not repairs). Since you have owned it for more than a year it will be taxed as long-term capital gain, which is taxed at lower rates than ordinary income. You can't just report the amount of the gain. On your tax return you have to show the purchase date, the basis, the date of the sale, and the proceeds. All amounts have to be reported in U.S. dollars. You have to convert the foreign currency to U.S. dollars at the exchange rate that was in effect at the time of each transaction.

If it turns out that you have a loss instead of a gain, you still have to report the sale, but you cannot claim a loss on property that was for personal use.

"no receipts kept" - That's obviously going to be a problem. You might not be able to add the cost of improvements to your basis if you have no records of the cost. The lower basis will make your taxable gain higher, so you will pay more tax.

You might also have to pay tax on the sale in the country where the apartment is located. If so, there is probably a tax treaty between the U.S. and the other country that you would have to take into account. You might also be able to claim the foreign tax credit on your U.S. tax return.

In addition to reporting the sale on your Form 1040 income tax return, depending on the amount there might be a separate reporting requirement, but not additional tax, on transferring the money to your U.S. account.

I suggest that you consult a U.S. tax professional about all of this. If possible, look for a tax pro who is also familiar with the taxes in the country where the apartment is located.

[circle11]

Thanks so much for your response. The place increased in value over the years so reporting the loss is not an issue. 

Wanted to clarify how improvements are calculated and reported. I bought the place with four concrete walls, nothing else. Does finishing it (interior walls and doors, floors, lightning etc count)? Does new kitchen and new appliances count? If I provide some documentation that the place had no appliances, will I still need to come up with receipts? Thanks again!

[rjs]

All the things that you mentioned are part of the structure and are counted as improvements, except appliances. Built-in appliances that are attached to the structure are improvements. But most kitchen appliances (at least in the United States) are not built-in, and therefore are not improvements.

Receipts or other records are needed not only to show that you made the improvements, but also to establish the cost. If the appliances are not built-in, it won't matter that you don't have receipts for those, since they are not improvements. But you obviously had major other costs for improvements. I again recommend that you consult a tax professional. The tax pro will advise you on how you can handle significant costs for which you have no records.