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An American citizen is selling a house in India (vacation…

An American citizen is selling...
An American citizen is selling a house in India (vacation home) for $550,000. Basis is $50,000. Tax rate in India for this type of transaction is 20%. How would I go about taking the foreign tax credit for him?
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Answered in 4 minutes by:
12/13/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,360
Experience: Taxes, Immigration, Labor Relations
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The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

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How to Claim the Foreign Tax Credit?

File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.

https://www.irs.gov/pub/irs-pdf/f1116.pdf

here are instructions

https://www.irs.gov/pub/irs-pdf/i1116.pdf

On your tax return - form 1040 - foreign tax credit is claimed on line 48

https://www.irs.gov/pub/irs-pdf/f1040.pdf

Be sure form 1116 is attached.

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Customer reply replied 8 months ago
Hi. I am aware of that but was wondering if you could give me some guidance or let me know of anything specific to look out for. If I remember correctly passive income is treated differently than other types of income.

The gain realize from the sale of your vacation home is NOT passive income.

Generally, a passive income is income realized from the passive activity which is defined as any rental activity OR any business in which the taxpayer does not materially participate.

That gain will be classified as capital gain - and as long as there is no losses - nothing you specifically may be concerned.

The choice you have - (1) to use form 116 and calculate a foreign tax credit or (2) to deduct foreign taxes on schedule A.

Depending on all your circumstances - either option may be more beneficial.

Please be aware that foreign tax credit may not be more than your US tax liability on the same income.

For instance - if US tax liability on THAT gain is $1000 (as calculated on form 1116) but in India you tax liability on that gain is $1200 - you will be able to use only $1000 as a foreign tax credit and remaining $200 will be carried to other tax years and could be use in future.

If you choose to deduct foreign taxes - the full amount is deducted - and depending in which state you live - that may help with state tax liability as well.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,360
Experience: Taxes, Immigration, Labor Relations
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