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I am now a US Citizen ( person of indian origin ) working…

I am now a US...
I am now a US Citizen ( person of indian origin ) working and residing in USA . However , I have 2 homes in India which I started to rent out in 2017 from June month of 2017 . Now , I am planning to file my US Tax Return for 2017 and please clarify the below in this regard : (1) I have to convert amount of each transaction of rent received or expense spent from Indian Rupees to USD to show in my US Tax Return here in USA and i am using the average yealy rate of 2017 as given in https://www.irs.gov/individual… . Let me know if it is ok or should I do conversion in some other way at the prevailing rates at each date of transaction like using the conversion tables as given by Federal Reserve Bank i.e., https://www.federalreserve.gov/releases/h10/default.htm ? (2) How to charge depreciation on my India Homes which are apartments in multi-story building i.e., what price to consider when there is no such classification of land price and structure price of my apartment ? (3) Can I ignore taking depreciation deduction in this Return of 2017 and leave it and start taking this deduction from next year ? (4) Can I take deduction of repair and renovation expenses on india rental homes sent in 2017 for any amount or it should be a small amount only ? (5) I have home loan mortgage on india rental home , but indian bank just give interest statement and does not give 1098 Form to report mortgage interest . Can I take deduction of this india mortgage interest in my US Tax Return or taking this deduction can trigger any inquiry because no 1098 Form ? (6) Does the amount of basis or price of home keep on changing every year for calculating depreciation and which formula is used to calculate depreciation every year ? (7) If i pay maintenance bill of india rental home to the association in rupees for 1 yr in advance on 25th March of 2017 i.e., from 1st April, 2017 to 31st March, 2018 , then should i just take deduction of 9 months in 2017 return @ Rupee-USD conversion rate of 25th March of 2017 and should take deduction of rest 3 months in tax return of 2018 @ conversion rate of 25th March, 2017 ?
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3/7/2018
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,036
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Welcome to Just Answer! Thank you for giving me the opportunity to assist you! I will do my best to help!

I have over 31 years' experience in international taxation, so I am able to assist you.

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You need to convert the transactions into US dollars using one of three methods. You can translate each one at the rate in effect on the date of payment. Second you can use the average exchange rate for the month of the transaction, or third, you can use the average rate for the year (or part of year in your case).

The depreciation rate and methods are different for property located outside of the US. You have to use the Alternative Depreciation Rate (ADR) for calculating depreciation. Residential Rental Property is depreciated straight-line over 40 years instead of the 27.5 used for property located in the US.

You cannot ignore or decide not to take depreciation. Internal Revenue Code (IRC) §168 says that when you sell it, you deduct depreciation allowed or allowable when you calculate your gain. This means you deduct from the basis the depreciation that you took or could have taken during the rental period.

Any amounts that are small repairs can be expensed or deducted. If the repairs are larger in nature, you can make an election to expense amounts up to $2500 for any one invoice.

You are allowed a deduction for mortgage interest paid, even to non-US banks. Make sure you retain the letter for evidence in case you ever get audited (not likely).

The basis does not change every year. The offsetting account, or "contra account" called accumulated depreciation, changes each year. It increases by the current year depreciation. The basis is the cost, which is fixed (it increases with major repairs or renovations) less the amount in the accumulated depreciation account.

You are a cash basis taxpayer, so you can deduct expenses that will expire within 12 months of the year end. So you can deduct the association dues. You use the exchange rate in effect at the time of payment on the full amount, and you deduct the full amount.

I hope this answers your questions. If you have any more, please feel free to ask and I will be happy to answer.

Thanks! Have a great week!

Roger

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Customer reply replied 1 month ago
In reply to my above point # 1 , (a) I receive indian home rent in my indian rupee bank account there and spend rental expenses through same account in rupees there . I feel the best method is to use date wise exchange rate for each rent or income received or each expense paid in india , although it will make more calculations work for me as compared to if i would take yearly average rate , ..................... am i doing correct ?
(b) Is it ok to use exchange rate table published by Federal Reserve Bank everyday for Rupee - USD conversion ?
(c) What does CONSISTENTLY mean here in these lines on IRS website ............. The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.In reply to my above point # 2 , I want to ask what basis or value should i take to calculate depreciation because i only know the purchase price of apartment which is mentioned in registration of home without any classification between land price and structure price ?In reply to my above point # 3 , Is there any negative effect if i do not take depreciation deduction on my india home rented first time just for 7 months in 2017 and start taking depreciation deduction from 2018 tax return . I am asking this because right now i do not have india home registration papers with me in USA to find the basis or value of home to start depreciation ?In reply to my above point # 5 , (a) i took india mortgage home loan few yrs back , but never thought to take its deduction in my US Tax Return and now when i rented it first time in 2017 for 7 months , i came to know to take its deduction in US return also . Is there any bad effect that i never took this deduction and starting from 2017 return ?
(b) Should i take first 5 months interest deduction on Schedule A and rest 7 months on Schedule E because house was vacant until May , 2017 ?In reply to my above point # 6 , (a) is it not true that the price or basis of home will keep on changing every year for charging depreciation if i do some capital nature improvements in home ?
(b) should i keep record of the accumulated depreciation on some paper as i file taxes through online tax service vendor ?In reply to my above point # 7 , (a) what is cash basis mean here ? Can i deduct maintenance bill of 12 months out of only 7 months rent because india home was rented only for 7 months in 2017 ?
(b) Is it ok if i have been using the yearly average conversion rate for my past year tax returns like 2014 , 2015 & 2016 , and now from 2017 , i start using prevailing date wise spot exchange rate datewise for all indian transactions there ?

If you want to use a daily rate, the IRS will accept it, but as you state it is quite a bit of work. There are numerous websites that will give you the exchange rates on any given date. One that I have used with the IRS is www.oanda.com although there are many others.

If it is a condo or apartment that does not have undivided title to land, you do not have to worry about allocating the purchase price to the common areas. However, if it comes with its own land that you will get title to, then you do have to allocate the purchase price to the land.

For the mortgage interest that you did not deduct, you can go back and amend three years to get a refund, so if you hurry you can still fix 2014, as it was due April 15, 2015 and will close April 15, 2018. And yes, the first 5 months interest will go on Sch A, unless you had it "available for rent" in which case you would start deducting all expenses, including interest, from when you first put it on the market to rent.

As I said, the cost basis of the house DOES NOT CHANGE. There is a separate account called accumulated depreciation that will reduce or offset the cost basis.

Cash basis means you deduct expenses when you pay them, and you report income when you actually collect the cash. So, when you pay 12 months' worth of expenses (such as insurance, association dues, etc) you get the deduction when you pay it. Deducting only partial amounts would be if you were on the accrual basis, which you are not.

And you need to be consistent with whatever method you have used in the past for conversion rates. The IRS accepts annual averages. If you have used that in the past, you should use it now. Unless you are using a currency that varies widely, it should not matter. So if you were using the annual average, continue using it.

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Customer reply replied 1 month ago
Going to accept your answer , please clarify in last :
(1) Yes , i was using the same annual average exchange rate for all transactions in same year since 2015 every year . But recently i was told by one of my friend's CPA that In general, use the exchange rate prevailing (i.e., the spot rate) when you receive, pay or accrue the item and you may only use the average yearly rates if your functional currency is not USD - that would be correct if all income and all expenses you pay in Indian Rupees. .............. that is why i am so confused now .(2) As you tell that i can deduct all 12 months mortgage interest , 12 months maintenance bill, etc. out of 7 months rent if the apartment was available for rent since Jan., 2017 even if it actually got on rent from 1st June , 2017 ? If yes , then how to prove that it was vacant due to not finding tenant for initial 5 months from Jan. to May of 2017 or its not needed to prove ?(3) Is there any negative effect if i do not take depreciation deduction on my india home rented first time just for 7 months in 2017 and start taking depreciation deduction from 2018 tax return . I am asking this because right now i do not have india home registration papers with me in USA to find the basis or value of home to start depreciation ?(4) For calculating depreciation , should basis or purchase price of apartment include everything like base price , registration fees , legal fees , covered parking price , one time possession fees, etc. ?(5) Can i change the price or value of apartment for depreciation in later years if i forget to add some fees or cost in purchase price of apartment right now in return of 2017 ?(6) As you mentioned that my tax return on cash basis , may i please know how is it determined that my taxes are done on cash basis and not on accrual basis ? Are there only two types of filing returns i.e., CASH BASIS and ACCRUAL BASIS ? Who can file the return on accrual basis and who on cash basis ?

Whomever told you that you had to use the foreign currency is incorrect. You are a US resident, and an individual, and filing a US tax return in US dollars. Per the Internal Revenue Code, and the regulations thereunder, the U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records. Your Indian rentals could be considered a QBU.

Even if you have a QBU, your functional currency is the dollar if any of the following apply.

  • You conduct the business in dollars.

  • The principal place of business is located in the United States.

  • You choose to or are required to use the dollar as your functional currency.

  • The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted.

So even if you treat your rentals as a QBU, that means that the RENTAL transactions can be denominated in the foreign currency. At the end of the year, since YOUR PERSONAL functional currency is the US dollar, you must translate the results for the year into US dollars based on the average exchange rate for the year, which the IRS does publish. The US Treasury Management website gives the official exchange rates.

The US tax system is based on honor. If you say that it was vacant but available for rent, the IRS will accept that unless you should be chosen for audit. If you are, there are ways to prove it was available - newspaper or Internet advertisements, statements from rental agents or realtors who tried to place people in the unit, statements from neighbors, or the association, etc. So if it was available for rent, you can deduct the expenses for any month that it was available, even if vacant. So if it was available from Jan 1, and you did not get a renter until June , you can still deduct the expenses from Jan 1.

I have seen clients with a property vacant for many months. I had one that was vacant for 18 months, and then sold, and the IRS tried to say that the taxpayers were trying to sell it, not rent it. My taxpayers had two ads from realtors that had it listed for "sale or rent". We took it to US Tax Court, and just before the trial date, the IRS gave in and said that it was available for rent. We won. So no problems!

If you do not take depreciation for the first year, when you sell it you will pay more tax, because as I said, the IRS rule is depreciation allowed or allowable. So even if you do not take it, the IRS will act as if you did when you calculate the gain from selling it.

You cannot really adjust the cost basis for fees that you forgot. The IRS is clear about that. It would be considered a change in accounting methods (their rules) and would require a Form 3115 and permission from the IRS. A much better answer is to get the right numbers now, and adjust them within the first few years through an amended return if errors are discovered.

Whether you are a cash basis taxpayer or accrual basis taxpayer is determined by the first US income tax return that you file. If you file on a cash basis, which is what the IRS defaults to, then you are cash basis for life, unless you request permission on a Form 3115 to change to accrual IF you start on accrual, then you remain on accrual, again, until you request a change. If you do not specifically state that you are on the accrual basis when you file your first tax return, you are on the cash basis.

Certain businesses are required to file on an accrual basis. Individuals are not.

taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,036
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Customer reply replied 1 month ago
Accepted your answer , please clarify :
(1) Now i understand that converting rupees transactions related to my India rentals @ yearly average exchange rate is perfectly fine even when i reside and work in USA and my personal currency here is USD but in india , the functional currency of all transactions is Rupees , .......... am i correct here ?
(2) For calculating depreciation first time , should basis or purchase price of apartment (which i bought few yrs back and kept vacant) include everything like base purchase price , registration fees , legal fees , covered parking price , one time possession fees, etc. because once i quoted the total purchase value of rental home in 2017 tax return , it cant' be changed in whole life ?(3) I understand now that if i don't take depreciation deduction in this 1st year of renting (because i don't have apartment buying papers with me here in USA to find correct price numbers of apartment & papers are in India currently) , i can start taking depreciation from next year return of 2018 assuming 2018 as first year of renting , ............. am i correct here ? and the only negative effect of this is the loss of little depreciation deduction in 2017 and no other problem like it triggers some fault in return , ........... am i correct ?(4) As i understand that my tax return will always be considered on cash basis and thus whatever the incomes i get in 2017 & whatever the expenses i pay in 2017 , i should report in my tax return of 2017 only even if some income or expense is related to some other year like 2018 or 2016 or whatever , ............ am i correct here ? and tax assessment of every individual is on cash basis unless he takes special permission for accrual basis , ............ am i right ?
Customer reply replied 1 month ago
Accepted your answer , please clarify :
(1) Now i understand that converting rupees transactions related to my India rentals @ yearly average exchange rate is perfectly fine even when i reside and work in USA and my personal currency here is USD but in india , the functional currency of all transactions is Rupees , .......... am i correct here ?(2) For calculating depreciation first time , should basis or purchase price of apartment (which i bought few yrs back and kept vacant) include everything like base purchase price , registration fees , legal fees , covered parking price , one time possession fees, etc. because once i quoted the total purchase value of rental home in 2017 tax return , it cant' be changed in whole life ?(3) I understand now that if i don't take depreciation deduction in this 1st year of renting (because i don't have apartment buying papers with me here in USA to find correct price numbers of apartment & papers are in India currently) , i can start taking depreciation from next year return of 2018 assuming 2018 as first year of renting , ............. am i correct here ? and the only negative effect of this is the loss of little depreciation deduction in 2017 and no other problem like it triggers some fault in return , ........... am i correct ?(4) As i understand that my tax return will always be considered on cash basis and thus whatever the incomes i get in 2017 & whatever the expenses i pay in 2017 , i should report in my tax return of 2017 only even if some income or expense is related to some other year like 2018 or 2016 or whatever , ............ am i correct here ? and tax assessment of every individual is on cash basis unless he takes special permission for accrual basis , ............ am i right ?
For #1, yes you are correct.For #2, yes. You include all the costs to acquire and put a piece of property into service.No, #3 is not correct. You need to start depreciation from the time it was first placed in service. If it was available for rent in January, you start depreciation in January. Even if it was not rented until June.Yes, you are a Cash basis taxpayer. The exception is if you pay something that will last for more than a year. For example, if you bought a five-year insurance policy. You could not deduct that all at once. But for paying one year's worth of expenses in the current year, that is allowed.
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