Question

Foreign inherited property sale and Foreign Tax credit

Forum|Forum|1 year ago
July 1, 2024
1 reply
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Need some clarification on how to report capital gains on foreign inherited property sale and foreign tax credits.

The confusion is between US step up basis vs non step up basis on foreign gains. Let's Says with the US step up, capital gains is 1K and gains in foreign country is 10k. I have paid full taxes on that 10k and will apply for foreign taxcredit on that.

While reporting here, should I just show the step up capital gains of 1k on my Sch D/1040 and apply for a full foreign tax credit on taxes paid internationally. Is this the right way to do it?. Or should I report 10K as my step up capital gains here and apply for FTC?

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P

pk12_2

Employee

@nikshep_s , without more details ( country, basis i.e. stepped up basis at inheritance, sales proceeds etc. ) I have a hard time imaging a scenario where the US gain is 1/0th of the foreign gain. Please provide more details -- thank you.

However, and assuming that this country has a tax treaty with US ( esp. double taxation clause ), US taxes you under its rules without regard to the rules of the foreign taxing authority rules. But if the income computed by the US laws is also taxed by the foreign entity, then the double taxation mitigation rules come into force ( foreign tax credit / deduction ).

I will circle back once I hear from you .

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nikshep_sAuthor

pk, thanks for the response. Country is India which has treaty with US for Double Taxation credit. Cost basis in India is based on the price it was acquired last and not step up like the US. Hence, the capital gains will be much higher there. Income computed in the US is not taxed in India. So, my concern is when i show the sale in the US on 8949, capital gains is almost 0. But the capital gain is much higher in India, which I have paid full taxes on.

Should I compute the US capital gains on 8949 similar to the capital gains calculation in India (basically using the cost basis rule used there)?. In which case, I will be confident to apply for full foreign tax credit(FTC).

TurboTax tax specialist recommended showing just the step up basis in the US and claim then FTC for taxes paid in India. I am not too confident with that approach.

Also, I have a carryover losses from prior years which is higher than the capital gains that I have on this sale. That amount will be deducted against the losses but i will still be entitled for the FTC, right?

P

pk12_2

Employee

@nikshep_s thank you for the clarifications. My understanding of the situation is as follows;

(a) you, a US person ( citizen/ GreenCard/ Resident for tax purposes ) was bequeathed a property in India through inheritance.

(b) you sold this asset during 2024.

(c) The country of the asset ( India ) taxed you based on its laws --- note that India uses an indexing process ( to recognize inflation based adjustment to basis ) and then taxes the remaining / resultant gain. ( although I think India holds a 20% tax through tax at source rules and then adjusts once the determination is finalized i.e. after tax year has closed ).

For US tax purposes;

1. you compute the gain under its rules -- i.e. stepped up basis to FMV at the time of passing of the decedent. Thus if you hold the property for quite some time after the inheritance is affected , the basis remains the same but the gain is likely to quite increased , even allowing for exchange rate degradation.

2. Taxes imposed/ paid on the US gain is the amount that is being doubly taxed ( it is actually the lesser of the US gain and the Indian gain) and this goes on your form 1116 as the foreign source income subject to double taxation. Note that what we are trying to here is determine the amount in US$ that is being taxed by both taxing agencies.

3. While most use the total foreign taxes paid for requesting credit ( it should really be the foreign tax on the amount that is being doubly taxed & allowing for different tax rates by different countries ). Also any foreign tax credits banked from earlier years only adds to the total amount of foreign credit but may or may not gain anything . This is because form 1116 has two limitations ---- (a) ratiometric allocation of foreign tax credit based on the tax on foreign source income to that on world income and (b) the lesser of taxes imposed on the foreign source income -- US and Foreign taxing authority.

Does this help or am I creating more confusion? If you like a more private / detailed discussion on unique features of your case ( that is not of interest to general community ) you are welcome to PM -- but please no personally identifiable info. -- identity sanitized.

pk