Adjustments on Capital Gains on Sale of Foreign Real Estate

Forum|Forum|3 years ago
December 29, 2022
2 replies
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Hi,

I sold land that I used as investment income (timber) in a foreign country. Can I deduct the following from the capital gains if it was not deducted from the reported gross proceeds?

•Seller’s fee

•Attorney’s fee

•Foreign capital gains tax (in addition to me claiming foreign tax credit)

Thank you in advance

Best answer by pk12_2

@pk12_2

I'm aware that I'm eligible for FTC, and I'm familiar with form 1116. What I'm unsure if I can offset the cost basis using the foreign capital gains tax, lawyer's fee and seller's fee as expenses. This will only affect the state tax that I pay, since my federal capital gains tax will be $0 because of the FTC.

Thank you for the heads up for those forms.

@Tette please see my answer on your refd. thread -- I have added to it .

To answer your question --- No you basis adjustment is ONLY due to cost of improvements ( + ) and accumulated depreciation (-).

The cost associated with the sale/ transaction such as lawyer's fees, transfer tax etc. adjust your sales proceeds (-).

Capital gain tax levied by a foreign tax admin is eligible for FTC but does not affect the US Tax filing ( form 4797 ) jut the form 1116.

Does this help ? or is there more I can do for you ?

Critter-3

Costs of sale are added to the property basis even if they are not deducted from the proceeds.

pk12_2

Employee

@Tette , Agreeing with @Critter-3 , may I suggest that you familiarize yourself with the form and the instruction for form 4797 at www.irs.gov. TurboTax ( my personal pref. for complicated returns is to use the Home & Business download/CD version ) will walk you through all the expenses of the selling process such as commission , lawyer's fees, sale preparation, transfer tax etc. etc. Also depending on the type of property and how long held there may be depreciation to consider . But Turbo will walk you through these things.

Also this being a foreign real-estate, there is exchange rate of the day to consider ; for US purposes the basis of the gain computation is generally acquisition cost ( or FMV if acquired by inheritance ) plus cost of any improvements over the years.

It would be nice to know which country you are talking about because there may be differences how the basis is computed for gains calculation.

For US purposes there may be depreciation recapture.

Please tell us more of the situation and one of us can walk you through.

You may want to read the following two IRS Pubs. :

https://www.irs.gov/forms-pubs/about-publication-523

https://www.irs.gov/forms-pubs/about-publication-544

Is there more I can do for you ?

TetteAuthor

@pk12_2

Thank you. I've looked at those forms and pubs.

I already purchased Deluxe so perhaps I can stick with it. Something to think about for next year. Thanks for the suggestion. There's no depreciation. It's land. The acquisition cost in Finland is calculated as 40% of current value if held for more than 10 years.

jtax

Employee

What is the "seller's fee?" As mentioned most costs of a sale are deductible or increase your basis.

Not sure if you can use foreign capital gains tax to offset the gain. That doesn't feel right given the foreign tax credit (FTC). I'm certain that you can't do both.

If the proceeds were deposited into a foreign bank account that you controlled, you make need to file an FBAR if the balance at any time exceeded $10k USD.

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pk12_2

Employee

@Tette , sellers fees ( my usage of the term ) are the sales commission, any fees that have to be paid for the right to sell / transfer etc. etc. -- just a catch all term for all the paperwork type of fees that one pays in different countries ( in the USA this would be realtor commission, inspection fees, up to code fees/ expenses, title insurance fees etc etc. )

The foreign capital gain and tax thereon is a foreign tax that is eligible for foreign tax credit -- passive category , just like any other capital asset sale. The foreign income from the sales ( the gain per the local tax laws ) is foreign income that is taxed by a foreign taxing authority. A form 1116 is required for this .

The US capital gains and tax thereon is computed under US tax laws and may be very different from the foreign capital gain. So yes you can get capital treatment for this . While it seems like you are double dipping -- you are not. The underlying asset and disposal thereof is being taxed by two different jurisdictions under different & local rules.

@jtax