What and how to file taxes on foreign commercial property sale under Portugal - USA tax treaty?

[ImpostoRapido]

Hi, I appreciate your guidance on an upcoming sale of foreign property such that I don’t get double taxed, and I make sure that both governments are satisfied (i.e., USA and Portugal).

• My parents purchased the property in 1994 and made my two brothers and I co-owners
• My parents reserved the right of use for themselves. "Right of use" is a Portuguese legal construct whereby they managed all aspects related to the property and used it for their own purposes. Selling/renting/etc would require their prior approval and/or them relinquishing their right of use
• Property is located in Portugal and was used as their company headquarters (i.e., it isn’t a residential property and we never lived in it)
• I was a minor at the time of purchase and have never been involved
• I am a US citizen. I live in the US and don't have a bank account in Portugal
• My father passed away with COVID and his business shuttered. My mother is relinquishing her right of use and the property is being sold
• Sales proceeds will be deposited in my brother’s account and then split three ways amongst us brothers. Current plan is to have my portion wire transferred to a Wise account and subsequently to my US BoA bank
• Portuguese law requires me to pay capital gains in Portugal. Previously these were a flat 28% rate over all capital gains accrued to non-resident foreigners. Now they are taxed in the same manner as Portuguese citizens. My estimated tax rate will be 25%. After tax I expect to receive less than $80K
• Portugal and the US share a tax treaty. Not sure that implies
• We have a potential buyer and expect the sale to go through sometime this year (i.e., 2024)

Given the above, how should I proceed in terms of:

• Using TurboTax next year to file 2024 taxes
• Any documentation required from Portugal (e.g., sale, government, etc) for IRS
• Revising/executing current plan of depositing proceeds (i.e., 100% to brother account -> 33% to my BoA account)
• Anything else you deem important

Thank you!

[AmyC]

1. You can use Turbo Tax next year.

2. You want any documentation that relates to your taxes. If you are reporting the income as your share of the sale of the home, you would want those documents.

3. As long as you have a good records for the  money, from the sale to your brother to you, you are fine.

4. You can always come back with more questions, best wishes and I am sorry for your loss.

[ImpostoRapido]

Thank you for your feedback and your message. Kindly allow me the follow-up:

1. Since I am paying 25% capital gains taxes in Portugal, and given there is a tax treaty between Portugal and USA, do I need to pay taxes on this sale in the US?

2. I am assuming the answer to 1) is "no" but I need to declare it. Hence, most likely there is a Form of some sort to fill-out in my 2025 taxes, whereby I declare the total profit and state the capital gains taxes already paid in Portugal, thereby amounting to zero what I pay to the IRS. If so, what is the Form?

3. I am assuming that capital gains on long term property are taxed at 20% in the US (https://www.irs.gov/taxtopics/tc409). If I pay 25% taxes in Portugal, will the extra 5% (i.e., 25% PT - 20% US) somehow be factored into my US taxes? (i.e., lower my US taxes)

Thank you!

[DaveF1006 · Accepted solution]

Yes, you do need to pay US tax on the property but you can apply for a foreign tax credit to receive credit for the taxes paid in Portugal. The calculation does factor in the taxes that you paid in Portugal versus the US tax rate and you receive a credit for the difference.

First you need to report the sale of your Foreign property.  This is accomplished by going to.

1. Federal
2. Wages and income
3. Investments and Savings
4. Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B)  
5. This would be reported as Other when you are asked to make this choice.

Once the sale has been reported, you will request a foreign tax credit.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5.  At some point in the interview, it will ask if you wish to take a deduction or a credit.  Take the credit.
6.  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.
7. The first that you will be asked is what category of income is it, you will say Passive income.
8. Next screen will say Country Summary, select add a country 
9. When it says Other Gross Income - XXXX, Here you put in the Gross Amount of the sale.. 
10. 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.
11. Finish out the section.