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Old 04-09-2011, 02:12 PM
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US capital gains tax on sale of foreign inherited property

I have some questions on foreign income:

1) How is the capital gains on the sale of a foreign inherited property, (on
which the foreign tax has already been paid) to be reported?

2) Entering this gain in Schedule D does not appear to link it with credit for
the foreign tax that has already been paid.

3) The US and the foreign country have a tax treaty preventing double
taxation. But I'm assuming it still has to be reported, with the US capital
gains tax on this item being offset by the foreign capital gains tax already
paid.

Has anyone been through this or know how / where to enter these items?

Thanks



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Old 04-10-2011, 03:26 AM
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“1) How is the capital gains on the sale of a foreign inherited property, (on which the foreign tax has already been paid) to be reported?”---->As a U.S. citizen or a resident of the United States, you are taxable on your worldwide income and US source income. Sales of properties located outside the U.S. by a U.S. citizen or resident should be reported on the U.S. income tax return. There may be a credit available for tax paid to the country where the property is located. Since you paid your LTCG to the foreign taxing authority, you can claim the LTCG taxes on your US federal return ONLY; you can’t claim your foreign LTCG tax paid to the foreign taxing authority on your state return. To be eligible for a tax deduction/credit, you need to file form 1116. The calculation when capital gains is involved is difficult, soyou may get some help from your tax practitioner.
“2) Entering this gain in Schedule D does not appear to link it with credit for the foreign tax that has already been paid. “----> As said above, you need to file form 1116. This form is not mandatory. It is used to claim a credit for income taxes paid to a foreign country when U.S. taxes are also paid on the same income.
“3) The US and the foreign country have a tax treaty preventing double taxation.”--->It depends on the situation; not all of the foreign countries have a mutual tax treaty with the US.
Please visit the IRS Website here; United States Income Tax Treaties - A to Z
“But I'm assuming it still has to be reported, with the US capital gains tax on this item being offset by the foreign capital gains tax already paid.”---> PleaseSee the form 1116 below.
http://www.esmarttax.com/uploadedFil...structions.pdf
http://www.completetax.com/taxguide/...0-form1116.pdf



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Old 04-10-2011, 03:36 AM
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You MAY have to file IRS form 3520 to report certain transactions with foreign trusts, and receipt of certain large gifts of bequests from certain foreign persons as long as you are a U.S. person who, during the current tax year, received more than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests.
Please go the Web site here; http://www.irs.gov/pub/irs-pdf/f3520.pdf



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Old 04-10-2011, 12:11 PM
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Thanks for the feedback, Wnhough.

Some follow-up notes on the question:

1) I read somewhere that the foreign tax credit can be entered in Schedule A. If so, which field, or line, would it have to be entered in?

2) The property had land plus a home, and the sales proceeds was shared by the heirs (four in all). This question is about someone who inherited the share of one of the four primary heirs. Does this make a difference?

regards.



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Old 04-10-2011, 01:59 PM
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“1) I read somewhere that the foreign tax credit can be entered in Schedule A. If so, which field, or line, would it have to be entered in?”---->1) On 1040 Sch A on line 8. If you do not itemize deductions on Sch A, then you can’t claim your foreign tax deduction; as you know, the foreign tax credit is designed to prevent double taxation between the US and foreign nations. If you're able to make full use of it, you'll get a larger tax benefit than if you claim a deduction for foreign tax paid. The reason is that a credit reduces your tax while a deduction only reduces your income. For instance, assume that you're in the 25% tax bracket and you have a choice between a $200 deduction or a $200 credit. If you claim the $200 deduction, your income goes down by $200, and your tax goes down by $50, 25%*$200=$50. If you claim the whole $200 credit, your tax goes down by $200. At this point, needless to say, you need to take the credit, not the deduction. But there are two reasons the deduction may be the better choice:the foreign tax credit limitation may prevent you from getting full value from the credit. The form needed to claim the credit is complicated. You don't automatically get to claim the full amount of foreign tax paid as a credit. The law is designed to limit this credit to the amount of US tax you would otherwise pay on the same income. For example, assume that you receive $2400 foreign income and pay $720, 30%*$2,400=$720, foreign tax. Due to your low tax bracket and various deductions, your US tax liability on this income is, say, $240, 10%*$2,400=$240. That means you can only claim $240 as a credit.If the reverse were true (you paid foreign tax of $240 when your US tax liability on the same amount would be $720) you still get only $24, NOT $720, credit because that's all the foreign tax you paid. You always pay the smaller amount: the foreign tax or the limitation amount.However, In genral, even when the limitation applies you come out better with the credit than with the deduction. In unusual cases the deduction will work out to a larger tax savings than the credit.
2) You MAY report income tax paid to a foreign country on your 1040 line 47; you need to attach the form 1116 to reduce yur tax liability on 1040.
Please visit the IRS Website here; http://www.irs.gov/pub/irs-pdf/i1040sca.pdf
http://www.irs.gov/pub/irs-pdf/i1040gi.pdf
“2) The property had land plus a home, and the sales proceeds was shared by the heirs (four in all). This question is about someone who inherited the share of one of the four primary heirs. Does this make a difference?”---->I guess if you pay both LTCG tax and inheritance tax to the foreign taxing authority, then you can claim your LTCG tax paid in the foreign country on 1040 line 8 or on Form 1116. However, you cannot deduct your foreign estate and inheritance taxes on Schedule A. As you can see, there is no federal inheritance /estate tax in 2010 in US; on January 1, 2010 a one year repeal of the tax was effectuated by a temporary, one-year-only rate of 0%. On January 1, 2011 the estate tax is scheduled to a top rate of 35% and the exemption amount is scheduled to be $5M or $10M for married couples.;law passed in December 2010. Also I guess, many U.S. states also impose their own estate or inheritance taxes,i.e., Ohio estate tax for an example and some, such as Kentucky, impose both estate and inheritance taxes; however, the amount of your portion of the inherited property is less than $1M, I guess, NOT sure, then you do not owe stae level estate/inheritance tax. You CAN’T claim your foreign inheritance/death tax on your state return, either.
Please visit the IRS Website here for more information in detail; United States Income Tax Treaties - A to Z



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Old 01-24-2012, 01:26 AM
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Last edited by TaxGuru : 01-24-2012 at 05:42 AM.


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Old 01-24-2012, 03:51 AM
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“1) How is the capital gains on the sale of a foreign inherited property, (on
which the foreign tax has already been paid) to be reported?”-->You can claim foreign LTCG tax paid to the foreign taxing authority on your 1040 linf 47 by filing form 1116 or can itemize it on Sch A of 104 line 8 on your US federal return; however, you can’t claim FTC on your state return. )). However, you may not claim a tax credit for taxes paid on any income which has been excluded from US taxation using the foreign earned income exclusion or the foreign housing exclusion. . You do not need to live or to work in that foreign country in order to claim this benefit.The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. If you are entitled to a reduced rate of foreign tax based on an income tax treaty between the United States and a foreign country, only that reduced tax qualifies for the credit.
“2) Entering this gain in Schedule D does not appear to link it with credit for
the foreign tax that has already been paid. “--->As described above, you need to file Form 1116 and report it on 1040 line 47 or on Sch A on 1040 line 8.
Please visit the IRS website here: http://www.irs.gov/pub/irs-pdf/f1116.pdf
“3) The US and the foreign country have a tax treaty preventing double taxation. But I'm assuming it still has to be reported, with the US capital gains tax on this item being offset by the foreign capital gains tax already paid.”--->To prevent double taxation, you need to report it on form 1116 and 1040 and claim FTC on US federal return. You do NOT need to pay LTCG taxes twice to both US and the foreign country.
However, you still need to pay LTCG tax to your state government, subject to double taxation at state level taxation.



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