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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15309
Experience:  15years with H & R Block. Divisional leader, Instructor
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I have a very specific International Taxation question. I

Customer Question

I have a very specific International Taxation question.
I am a Dual Citizen US / Germany, living currently in California, for the past 30 years. Last year I purchased, with my (German) sister and her husband, a dilapidated property that we were going to fix up and rent out. Now a very interested buyer has surfaced. Under German Tax Law a gain like this is subject to a 45% Tax rate, which we all will have to pay. That is all the tax liability for my German partners are subject to. I know I will have to declare this on my US / CA returns. What can I expect in terms of additional tax to be paid?
My question is in essence - will I get credit for this tax (45% German tax) paid for the Federal Tax / Capital Gains Tax and / or my CA Tax.
Thank you.
Submitted: 2 years ago.
Category: Tax
Expert:  Robin D. replied 2 years ago.
Hello and thanks for trusting me to help you today. I am a tax adviser with over 20 years of experience.
You will be taxed on the gain that you realize (this is true for federal and state). The rate will depend on your total income and filing status.
You will be allowed to claim a credit for the tax paid in Germany.
Form 1116 would be used to claim that credit.
If you receive foreign sourced capital gains (including long-term capital gains that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116, line 1a.
Generally, if the foreign sourced income was taxed at the 15% rate (capital gains rate remember is based on your total income so I am using 15% as example), then you must multiply that foreign sourced income by 0.4286 and include only that amount in your foreign source income on Form 1116, line 1a.
It is a complicated calculation , but, in answer to your question, yes, you can claim a credit for foreign taxes paid.
Customer: replied 2 years ago.

Thank you for the quick response. That was my original thought.

However, I was made aware of

#4 - The tax must be an income tax (or a tax in lieu of an income tax)

which something classified as a Capital Gain would not qualify for.

Expert:  Robin D. replied 2 years ago.
The capital gain is allowed but you must calculate a little differently.
Foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax.
Customer: replied 2 years ago.

You mean the credit is allowed for Capital Gains? How would I calculate this? By "I" I mean my International Tax attorney who advised me that only traditional income tax was subject to the FTC.

What section of the IRS code could I reference?

Expert:  Robin D. replied 2 years ago.
It has to be adjusted by the rate of the US tax that is placed on the income.
Your tax professional will find the instructions with the form 1116.
U.S. Code › Title 26 › Subtitle A › Chapter 1 › Subchapter N › Part III › Subpart A › § 904
Customer: replied 2 years ago.

Thank you. I will run this by him.

I have an unlimited membership to justanswer, so I trust I can pick this up again if need be.

Thanks and bye for now.

Expert:  Robin D. replied 2 years ago.
You are most welcome.
My goal is to give you excellent service.
Your positive rating is thanks enough
Customer: replied 2 years ago.


response from my attorney. Can you comment, please....

"The section your adviser brought up does not change the fact that the German Speculation Tax is not an eligible tax to be taken as a FTC. The only taxes eligible are (1) income taxes (2) war profits taxes (3) excess profits taxes. The Speculation Tax does not fit into any of those. You can still take regular German income taxes on the sale as FTC though. The section your adviser brought up only talks about the general limitations to taking the foreign tax credit. The only possible option, you *may* be able to take the Speculation Tax as a deduction instead of a tax on Schedule A. I would suggest looking in this area, because as I see it now, the Speculation Tax cannot be taken as a credit."

Then another question I have - can a 'speculation tax' be an income tax?


Expert:  Robin D. replied 2 years ago.
If the attorney is referring to a tax on the transfer not capital gains on the sale it self then they are correct.
It is the Capital gains tax that is allowed as a FTC as I advised.
The actual tax in Germany is the defining section. Is it a transfer tax on the change in ownership or is it a tax on the gain you receive from the sale?
Customer: replied 2 years ago.

I am under the impression it is a tax on the gain received from the sale. The buyer would pay taxes associated with ownership.

Rough example:

Purchase Price: 500,000

Construction Costs: 2,000,000

Sales Price: 3,500,000

Gain Subject to 45% Tax in Germany: 1,000,000

Buyer will pay (recording tax) of 5% associated with transfer.

Even if the German tax authorities classify the gain as regular income, is that something the IRS will go by for deciding whether or not this tax paid can be taken as a credit?

Expert:  Robin D. replied 2 years ago.
Yes, it is the tax on the gain not a "transfer tax" on the property that is important.