Sale of second home in foreign country

Forum|Forum|2 years ago
March 30, 2024
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If I sale a second home in foreign country in 2023 and I pay tax deducted at source (say 10000 dollars) to foreign country in 2023.

I then take foreign tax credit of 10000 dollars while filing US tax return for 2023.

After I file tax return for foreign country for 2023, assume I get back 4000 dollars (amount is received in 2024) because the actual taxes were lower.

In which US tax (year 2023 or 2024) return these 4000 dollars get reported and for what category of income.

Best answer by mglauner

If you receive part of the Foreign Tax you paid back, you add the income and pay regular income tax on it on your 2024 return.

The tax benefit rule states that, if a deduction is taken in a prior year and the underlying amount is recovered in a subsequent period, then the underlying amount must be included in gross income in the subsequent period.

Here's more info and instructions for Reporting Return of Foreign Tax Paid.

mglaunerAnswer

If you receive part of the Foreign Tax you paid back, you add the income and pay regular income tax on it on your 2024 return.

Here's more info and instructions for Reporting Return of Foreign Tax Paid.

Peter_111Author

So if foreign country withholds 10000 dollars in 2023 from proceeds of house sale and I know while filing US return that I will get back 4000 from foreign country in 2024, while filing US return I can take foreign tax credit only for actual tax of 6000. Then the refund of 4000 is not gross income for 2024 US tax return. It already was included in 2023 US tax return. Correct ?

Vanessa A

Correct. If you are expecting a refund of some part of the taxes that you had withheld, it is best to not claim the part that you are expecting to be refunded to you. This will keep you from having to claim it as income in 2024. .

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Mike9241

Foreign Taxes Not Eligible for a Credit
You can't take a credit for the following foreign taxes.
1. Taxes paid to a foreign country that you don't legally owe, including amounts eligible for refund by the foreign country. If you don't exercise your available remedies to reduce the amount of foreign tax to what you legally owe, a credit for the excess amount isn't allowed. The amount of tax actually withheld by a foreign country isn't necessarily 100% creditable. See Regulations section 1.901-2(e)(2)(i).

The US has tax treaties with many counties,. The tax withheld can exceed the treaty rate. You are only allowed to claim the lower of the taxes paid or the treaty rate.

from form 1116

Foreign Tax Redeterminations
If you claim a credit for foreign taxes paid, and you receive a refund of all or part of those taxes in a later year, you must file an amended return reducing the taxes credited by the amount refunded.

Reporting requirements. If the above foreign tax redeterminations occur after you file your tax return, and the foreign tax redeterminations change the amount of U.S. tax due for any tax year, you must generally file Form 1040-X, Amended U.S. Individual Income Tax Return, or other amended return, to notify the IRS so that your U.S. tax for the year or years affected can be redetermined. If you have a foreign tax redetermination that results in an increase in your U.S. tax liability for any year, note in the explanation of changes section of your amended tax return (for example, Form 1040-X, Part II), “This amended return and Form 1116 are for a change in foreign tax credit that increases U.S. tax liability.” Complete and attach to Form 1040-X (or other amended return) a revised Form 1116 for the tax year(s) affected and a statement that contains information sufficient for the IRS to redetermine your U.S. tax liability. In some cases, you may not have to file Form 1040-X or attach Form 1116. See Pub. 514 for more information, including exceptions. An increase in your U.S. tax liability as a result of a foreign tax redetermination is excepted from the general statute of limitations against assessment and collection. See sections 6501(c)(5) and 905(c).