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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Hi Chris, Quick question. Can foreign inheritance tax levied

Resolved Question:

Hi Chris,
Quick question. Can foreign inheritance tax levied when property was inherited in a foreign country be claimed as a foreign tax credit on form 1116 for passive income in that country.

Or should it be just added to the cost basis of the property -which does not help since the sale had non-deducitble loss (second-home).
Submitted: 10 months ago.
Category: Tax
Expert:  Lev replied 10 months ago.

Lev :

Hi and welcome to our site!
Chris is not available today and I will be helping you.

Lev :

A foreign tax credit on form 1116 is claimed against INCOME taxes - so only income that is subject of foreign INCOME tax is eligible for such credit. If any income is subject of US and foreign income taxes - you may claim a foreign tax credit - thus effectively will eliminate double taxation of the same income. That is the mail purpose of a the foreign tax credit.
The credit is limited by the US tax liability on the same income - the form 1116 is used to calculate the amount of credit. Means - if tax liability abroad is higher - there will not be US taxes on that income, but if tax liability abroad is lower - in the US you will pay the difference after the credit will be applied.
Other types of taxes such as property taxes, estate or inheritance taxes, sales taxes, transfer taxes, etc related to the property are not income taxes and may not be used to claim a credit on form 1116.
Foreign estate and inheritance taxes may be claimed as deduction against US estate taxes - if such taxes are due. But not against income taxes.

Lev :

In general - you are correct - inheritance taxes are added to the basis of the property - and because you realized a loss - you may use the capital loss to offset other capital gains - but if you have net capital loss - only up to $3000 may be used to offset other taxable income and the rest should be carried over to following years.

Customer:

OK. Thanks but it is a nondeductible loss (second home) does not seem to help to add to the cost basis.

Lev :

If that is inherited property - the loss is deductible unless you specifically converted it to personal use.

Lev :

Inherited property always considered as investment property - and if it is sold shortly after - the loss is deductible. If the property was converted to personal use - and was used as such - then you are correct - the loss realized from the sale may not be deducted.

Customer:

OK. I will check this -it is strictly inherited property. However, in addition when you calculate the form 1116 it asks you for a foreign loss and if foreign loss is added it then reduces the foreign income - for which foreign income tax (interest in bank) is levied -thus actually seems to raise the tax liability.

Lev :

Form 1116 never increases your tax liability.
But it may reduce the credit based on foreign sources taxable income.
Inheritance is NOT a taxable income in the US. Only income that is subject of US income tax may be used.

Customer:

Sorry computer problems. It seems that claiming the loss in Scdule D reduces the foreign tax credit more than I gain on claiming the loss. Does it make sense ?

Customer:

In other words maybe it is not worth claiming the loss on sale in schedule D if it reduces your foreign income and foreign credit

Customer:

Another thing is that it was sold to related party so loss cannot be claimed it seems anyway

Customer:

related party -my sister

Lev :

That is correct - you may not claim a loss if the property is sold to a related party.

Customer:

OK. In that case it seems I will just treat it as second home sale and claim my foreign tax credit.

Customer:

foreign tax credit is due to bank interest and has nothing to do witht he sale of the inherited property

Lev :

You are also correct - if you have a gain and a loss from foreign sources - they must be combined when a foreign income tax credit is calculated.
However - to claim a foreign tax credit - you must have a foreign income taxes paid on the income from foreign sources.

Customer:

yes I do have foreign income from bank interest and loss would reduce it. So the only thing isis it more correct ot enter it as second home sale (no loss allowed) or sale of investment to related party (0 loss)

Lev :

If your foreign tax credit is limited or because foreign income taxes are higher than in the US - instead of claiming a foreign tax credit on 1116 - you may deduct the full amount of foreign taxes on schedule A.
In some situations that might be more beneficial - at least you may try.
In additional - that will be deducted for state income tax purposes.

Customer:

no schedule A does not seem to work well maybe AMT or sth. So the only thing is how to enter the sale of inherited property second home or sale of investment to related party to be more correct. Tax seems the same in each case

Lev :

The sale transaction is reported on form 8949. Then you will enter another line for disallowed losses with positive amount - so the total woudl be zero.

Customer:

Yes. bout does it matter if it is entered as the sale of second home or sale of investment to the related party

Lev :

Doesn't matter as the result will be the same.

Customer:

OK. Thank you. Excellent service. Pleasure talking to you

Lev :

I am glad to be helpful. Sorry computer issues.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22696
Experience: Taxes, Immigration, Labor Relations
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