Discussion:Property sold in foreign country
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Discussion Forum Index --> Tax Questions --> Property sold in foreign country
| 26 April 2007 | |
| Hi all,
Need some help with this situation - I have a client who owned and lived in a residence as her main home in foreign country A for 1 and a half year and then moved to country B. She then rented out this property and took the position of Section 469(j)(7) on the returns for two years before it was sold. QUestion: how to report the capital gain? If the spot rates of purchase date and sale date were used respectively, it would result in huge capital gain in US$ even though this seems to be a paper gain and that a portion of gain can be excluded under section 121? How about the foreign mortgage gain? Provided the facts and circumstances, could it be considered as a QBU? Would it make a difference in reducing the tax liabilities? Is QBU an election that would need to have been made at the time when the property was converted to rental two years ago? Thanks a lot for your input. | |
| 26 April 2007 | |
| needs two out of five years for 121 gain exclusion, not a qualified principal residence, gain or loss on Sch D, compute acquisition basis at the then current rate of exchange, same for date of disposition, installment sale based on date of receipt (disbursed by mrtgee), additional mtge gain short-term currency transaction, don't forget offset for foreign tax liability and reporting requiremtns in country of origin. | |
| 27 April 2007 | |
| Thanks. Forgot to mention that he moved to foreign country B due to change of employment so should be entitled to the reduced exclusion.
Could she make use of QBU provided the situation above? | |
| 27 April 2007 | |
| Doesn't meet the "B" of QBU for the period of time it was a residence, so much of the QBU benefit would be deminished. Should have elected at the time.
Agreed, reduced exclusion allowable, but sounds like s/he met 2/5 rule anyways. | |
| 27 April 2007 | |
| Thanks Liz.
The client bought the porperty in UK. While the cap gain was about 40,000 GBP but due to the big fluctuations of spot rates betweeen the date of purchase and date of sale, the gain in US$ was huge. are there alternative exchage rate she might possibly use e.g. average rate or rate at the date of sale for both purchase and sale price? Based on your comment above, could it still be possible to make the election by doing 1040X for the year that it was converted to rental property? Would the 469(j)(7) election disqualify the "B" of QBU? She just lived in that home for a year and a half before moving to another country as change of employment so did not meet the 2/5, unless advise otherwise. | |
| 28 April 2007 | |
| She can do anyways, with less than 2/5, on a pro rata basis due to the change of employment.
The rates you can use are spot rate on the date of purchase and date of sale. The UK definition of date of purchase and date of sale aren't the same as ours - there are strong arguments for using "date of exchange" and weak arguments for using "date of completion". If you use the date of exchange, use it for both the sale and the purchase; it would be extremely difficult to argue one for one the other for the other. Useful deductions: On the date of completion, she probably also paid legal fees, surveyor fees, survey fees, and so forth. At the purchase, she may have paid stamp duty. At the sale, a broker fee of about 1%. There may have been improvements as well. I'll let someone else handle your other questions. | |
| 29 April 2007 | |
| 1. Generally speaking this is almost always a moot point because almost all folks in these circumstances will have plenty of excess FTCs, so taxing a gain makes no real difference to the bottom line of the return.
2. Are you sure your facts are right, no-on has made a dollar mortgage gain in years because the dollar has been falling. 3. I agree if you have gone for 469(j)(7) it may be trickty to argue it was a QBU, but again we don't have enough facts. Go back to check all the carryovers, depreciation recapture, AMT carryovers, spot rates on dates of exchange/completion etc but possible FTC carrybacks from country C. I'd be surprised if there is much tax at stake. | |
| 30 April 2007 | |
| Thanks for the above and I took into account of the above.
She also took out a GBP mortgage when she first purchased the property and refinanced it 6 months after she converted it into rental property which resulted in foreign mortgage loss for the payoff. However, my understanding is that this loss would be considered as personal loss and not deductible. Is that correct? If not, is there any Code or Rev Ruling providing strong argument that it could be considered as ordinary/capital loss treatment instead? | |
