sale of foreign commercial property by US citizen

[Naveen Mohan from New York]

I have a client who is a U.S. Citizen, He is selling his commercial property in India and bringing the cash proceed to America. Since U.S. citizens are supposed to report all worldwide income so I think it is a reportable transaction. Do I report it on Schedule D.

 

Can he take credit for foreign tax credit for income tax he pays to government of India? do I need to attach a copy of his Indian Income tax return or will that only be required if and when asked by IRS.

 

 

Thanks for your help.

 

Naveen mohan 

[kcjenkins]

Yes to Sch D.   Not sure about attaching the Indian Income tax return, I'd be inclined to say wait until/unless it's asked for.

[SaraEA]

The sale of a foreign asset is definitely reportable (Sch D if investment property, Form 4797 if income producing).  Your client will get a foreign tax credit for the tax paid to India, but don't mislead him into thinking he'll get away with the full amount.  First, if this was long-term capital gain property, he won't credit for more than the US would tax him (usually 15%, more in highest income brackets).  India is going to tax him way more than that so kiss the excess goodbye (likely you will use the high-taxed column in the general category on F 1116).  Then there's a reduction based on how much of your US income tax is attributable to the foreign income.  Simplifying things a bit, if your foreign income was 10% of your total income, you can't get a credit for more than 10% of your total US tax.  (There are worksheets for this so don't fret.)  Unused credits can be carried back for one year or forward for 10 years.

 

I just completed one of these for a couple who paid $40k in foreign tax on a $160k gain.  Their foreign tax credit was in the neighborhood of $10k.  And I couldn't arrive at any of these numbers until I converted francs into dollars!  You have every right to charge A LOT.

[kcjenkins]

Great answer, Sara.  What about attaching the foreign return?

[SaraEA]

I have not only never attached a foreign return to show foreign tax withheld, I have never even SEEN a foreign return.  IRS has never questioned.  They must already know that in certain countries sale of real estate, for example, is automatically taxed at an obscene rate.  And in some countries the tax is levied on the gross sales price, not net gain.  Kind of like foreign dividends.  Some countries tax them at 20 or 25%.  Has anyone ever had the IRS object to what you put on the 1116?