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I have a client that lives in NY and sold a flat in the UK…

I have a client that...
I have a client that lives in NY and sold a flat in the UK in 2017. The capital gains on her UK return was caluclated to be $4,405 pounds. The actual calculation was $15,405 -11,000 personal allowance. She paid 793 pounds as a capital gains tax. My question is what schedules am i preparing to show this sale on her 1040.
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Answered in 16 minutes by:
3/19/2018
Chad EA, CFP ®
Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional
Category: Tax
Satisfied Customers: 2,162
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Hi Vito,

Even though the property is located in another country you will still report the sale exactly the same way you would a property held in the US.

___

For a personal use property use Schedule D, Capital Gains and Losses, and Form 8949., (form 4797 for investment property) to report the home sale.

___

To choose the foreign tax credit, you generally must complete Form 1116. and attach it to the 1040.

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This information is covered in part, in IRS Publication 544 which I have linked to below.

"If you are a U.S. citizen with income from dispositions of property outside the United States (foreign income), you must report all such income on your tax return unless it is exempt from U.S. law.

https://www.irs.gov/pub/irs-pdf/p544.pdf

Please let me know if you have any follow up questions.

Thank you.

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Customer reply replied 1 month ago
Am I reporting the gain as $4,505 or 15,505.One thing confusing to me is that the flat was bought 30 years ago at about 47,000 pounds. I guess there was no cap gains until recently in UK. Why is the gain not the selling price of 425,000 minus 47,000 minus improvements. Instead Ernst and Young took a value of April 5th 2015 of $400,000 plus the cost of sale 9,495 minus 425,000 for a net gain of 15,505 less 11,000 = 4,505.

Very good question. You would exclude the personal allowance amount because that is UK tax law and report the 4,405 pound gain converted to dollars.

Earnest and Young may have used the value on April 15th if the home converted from a personal use home to a rental property or second home.

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Customer reply replied 1 month ago
even though the value increased from 47,000 to 425,000 I am using UK law to calculate gain. Of course converted to dollars.4405 x 1.35 in this case?

Yes, you would use UK law to report the gain. You follow the law where the property is located.

Chad EA, CFP ®
Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional
Category: Tax
Satisfied Customers: 2,162
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
Verified
Chad EA, CFP ® and 87 other Tax Specialists are ready to help you
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Customer reply replied 1 month ago
Thank you so much

For the currency conversion.

"The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.

When valuing currency of a foreign country that uses multiple exchange rates, use the rate that applies to your specific facts and circumstances.

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Here is a link to a table with the yearly average conversion rates for the United Kingdom.

https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

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Customer reply replied 1 month ago
One last question the sale took place in 2016. I have to amend the 2016 1040 and It-201 yes?

Oh... Unfortunately, you do have to amend the tax returns.

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Customer reply replied 1 month ago
thanks again
Customer reply replied 1 month ago
The UK tax was paid in 2018 because it was deferred. Since it was sold in 2016 am I showing the sale on the amended 2016 return and the payment of tax as well.Bit confused about the payment and how to show that since it was paid in 2018.

That is a tough situation.

The sale occurred in 2016, but technically, the tax was not paid in 2018 and should only be deducted in the year the tax is paid.

If the tax was paid, I would feel comfortable including the tax in the year of the sale with the amended 2016. I would speak with the client and explain the situation and also discuss deducting the paid tax in 2018 as opposed to 2016 and how this may affect their tax returns. The decision is ultimately the tax payers as long as they are making an informed decision.

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Customer reply replied 1 month ago
But if i deduct it in 2018 then there is no offset to the cap gain in 2016?

I understand. As cash basis tax payers you should only deduct expenses that have actually been paid.

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Customer reply replied 1 month ago
in this case would it be correct to not file 1116 since it was paid in a different year namely 2018

That would be correct because they didn't make the payment until 2018.

If you did file the 1116 for 2016, you wouldn't be able to prove the expense.

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Customer reply replied 1 month ago
silly yo file the 1116 for 2018 and showing a payment correct?

Yes, I would file the 1116 for the year the payment is made, which is 2018.

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Generally, as you know, the taxes are paid in the year of the gain....

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Customer reply replied 1 month ago
i know.So in summary they will be making a payment of cap gains on the amended 2016 return and then recouping the tax paid to Uk on the 2018 return?

In summary, you are correct.

Unfortunately as cash basis tax payers you can only deduct payments made in the year you make the payment.

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Customer reply replied 1 month ago
thank you very much
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