Question

Foreign tax credit on sale of overseas property

Forum|Forum|3 years ago
March 11, 2023
1 reply
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We have sold a residential property (condo) in India in 2022 - sale was at a loss, so no income. However, as per Indian Laws, for a foreigner (non-resident), tax of 22.88% is charged on the sale value and is deducted by the buyer from the payment. The buyer deposits the 22.88% with the Tax dept and provides a receipt (I have that receipt) and pays the balance of 77.12% to the seller.

My question is: I am using TurboTax Premier (desktop) for filing my taxes and I am not able to enter the taxes that were deducted in India. TurboTax does not provide any option of taxes since the sale is at a loss. Please advise how these taxes can be entered so that I can take a foreign tax credit (India has a double taxation treaty with USA).

Thank you.

P

pk12_2

Employee

@manoj202 , Namaste, Manoj ji.

(a) as I understand , India indexes the basis ( acquisitions cost + cost of improvements etc. ) and computes capital gain based this basis. Then it taxes any gains. India also has wealth tax and other ancillary taxes on a transaction.

(b) For US purposes when you report a disposal of an asset , the basis is NOT indexed -- it cost of acquisition + any cost of improvement LESS any depreciation allowable whether taken or not -- adjusted basis. Fro US purposes your sales proceeds is defined as Sales Price LESS any sales expenses such as commission, sales prep expenses etc. transfer taxes etc. etc. The gain is then computed as the difference between Sales Proceeds and Adjusted basis. Note that out of this gain, any gain that is due to the depreciation allowable is treated as ordinary income ( because you could have taken a depreciation adjustment as a negative amount on your schedule-E ( rental income ). The rest of the gain is given capital gains treatment.

(c) as you see from the above you may have a loss in India but have gain in the USA on the same transaction.

(d) if you paid any income tax on the transaction / foreign income in India , then this is eligible for foreign tax credit ( always requires foreign income) or a tax deduction iif you itemize ( but note that deduction comes under SALT ( Sate and Local Tax ) limit of $10,000.

(e) Turbo Tax is quite capable of doing this for you --- I use Home & Business version and enter the details of the sales under "business income" -- sale of home/ residence ; also claim the foreign taxes paid under "deductions and credits".

Hope this helps -- if you need more , please feel welcome to add to this thread

Namaste

pk

M

manoj202Author

Hello PK

Thanks for your explanation - TurboTax has also calculated a loss on the sale of the condo after considering the buying price and depreciation etc. The property was purchased in 2007 when the exchange rate was around INR 30 to 1US$. At the time of sale last year, the exchange rate was approx INR 82 to 1US$ - so in US Dollar terms also, the sale price was less than the buying price.

I did pay any income tax on the sale as there was no income - however there was Tax deduction at Source (TDS) on the sale amount as I mentioned in my original post. I would like to set off those taxes against my Fed Taxes here - that I why I was trying to figure out how to enter them in TurboTax.

Thank you

P

pk12_2

Employee

@manoj202 , please see my note (d) above on how to get the foreign tax credit. If you run into trouble or something is not working as expected, please feel welcome to write back and I will work with you to solve the issue(s)

Note that for form 1116, TurboTax may not automatically recognize the foreign income associated with the foreign taxes paid -- so you may have to enter this yourself ---- I do it often in forms mode on the 1116 worksheet. Also you have to use income category "Passive income" .

Namaste ji

pk