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Reporting capital gains on sale of land in India in Federal and California returns

Forum|Forum|1 year ago
November 24, 2024
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Hello Gurus,

I am an US citizen and resident of California. I sold a piece of land in India in July 2024. The Indian tax authorities deducted a hefty tax at source (a.k.a TDS, Tax Deducted at Source), from my sale proceeds @~24%. This is kinda a witholding tax to be adjusted against my Indian Tax Return (a.k.a ITR) next year. BTW...India's fiscal year runs from April to Mar, so I will file my ITR after April 2025 and expect to get a refund out of my TDS.

Now, here are my questions :

1. Do I need to report this sale and include the capital gains in my Federal tax return of tax year 2024 even though US and India has a Double Tax Avoidance Agreement (DTAA)?

2. If the answer is YES, do I or how do I report the capital gains made in Indian Rupees (INR) and more importantly how do I claim the capital gains taxes paid, because so far, I have only paid the TDS and not the actual LTCG in India. Note : Because of the DTAA b/w US and India, I do not neccessarily want to claim Foreign Tax credit, if I do not have to show the sale of property and the capital gains in my Federal return.

3. This is the most intriguing question. Do I have to report this sale of land in my California tax return? I have heard that even though US and India has a DTAA treaty, California doesn't respect that. If that is true, how do I report this sale of property and do I get any deduction/credit for the deemed taxes (i.e. not yet paid) for LTCG?

Thanks in advance to the respondents.

Best answer by SusanY1

As a US citizen, you do need to report all of your worldwide income, including any income subject to a Tax Treaty (or DTAA). The DTAA doesn't alleviate the requirement to report the income, but rather tells us how to treat the income on the tax return. Different types of income are often treated in different ways.

You can see the treatment of gains in Article 13 of the US-India Tax Treaty. (As you will see, it doesn't say a whole lot.)

You will report the sale in the same manner as you will a US capital gain but you will convert to USD. You can use any reasonable method to make your conversion. Since the transaction occurred on a specific day, you may wish to translate using that day's average exchange - but you're not required to do so.

Another acceptable method is to use the average annual exchange, as found here: Yearly average currency exchange rates.

The most beneficial treatment for you on your US tax return will likely be to take a foreign tax credit for the tax (converted to USD) paid on your gain. TurboTax (when fully available) will walk you through this - but that section can sometimes be a little tricky so please do come back and let us know how we can help once you're ready to file. You are allowed to take a credit for the accrued ("deemed") taxes, even though you will pay them at a later date.

For California, you will unfortunately have to report the gain as taxable income since you are a full-time resident of the state. There is not an equivalent tax credit on the California return for foreign taxes paid. However, you can include the California tax paid on foreign income as foreign taxes paid when calculating your federal tax credit. See this discussion on that topic. You will have to prepare your federal return, then your California return to determine that tax paid. Then you will return to the federal portion to include that additional tax.

SusanY1Answer

As a US citizen, you do need to report all of your worldwide income, including any income subject to a Tax Treaty (or DTAA). The DTAA doesn't alleviate the requirement to report the income, but rather tells us how to treat the income on the tax return. Different types of income are often treated in different ways.

You can see the treatment of gains in Article 13 of the US-India Tax Treaty. (As you will see, it doesn't say a whole lot.)

You will report the sale in the same manner as you will a US capital gain but you will convert to USD. You can use any reasonable method to make your conversion. Since the transaction occurred on a specific day, you may wish to translate using that day's average exchange - but you're not required to do so.

Another acceptable method is to use the average annual exchange, as found here: Yearly average currency exchange rates.

The most beneficial treatment for you on your US tax return will likely be to take a foreign tax credit for the tax (converted to USD) paid on your gain. TurboTax (when fully available) will walk you through this - but that section can sometimes be a little tricky so please do come back and let us know how we can help once you're ready to file. You are allowed to take a credit for the accrued ("deemed") taxes, even though you will pay them at a later date.

For California, you will unfortunately have to report the gain as taxable income since you are a full-time resident of the state. There is not an equivalent tax credit on the California return for foreign taxes paid. However, you can include the California tax paid on foreign income as foreign taxes paid when calculating your federal tax credit. See this discussion on that topic. You will have to prepare your federal return, then your California return to determine that tax paid. Then you will return to the federal portion to include that additional tax.

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U

Userna

Hi, I need help.

Hi, I’m in the same boat. I’m trying to file my taxes using TurboTax Premier desktop version but I’m having trouble figuring out where to report the taxes deducted at source. I’d really appreciate any help!

DaveF1006

Generally, you wouldn't report taxes deducted as source because you usually get these refunded when you file your Indian tax return. If these taxes are not all refunded, you can claim a foreign tax credit for the taxes.

Go to Federal
Deductions and credits
Estimate and other taxes paid
Foreign Tax Credit>start or revisit
As you go through the screens, when it asks "Tell Us About Your Foreign Taxes" select none of these apply.
When it asks if you wish to take the deduction and credit, take the credit.
Continue through until you reach a screen that says "No other income or expenses" Say no
Continue through until it asks the income type, say Passive Income
Next add a country pick India
Other Gross Income say Sale of Property and the Gross Amount of the sale
Continue through the interview until it asks for the foreign taxes you paid, here record the amount.
Now you are done reporting the foreign taxes. Just keep going through the section without making any more entries. You will have finished reporting your gross income from the sale and the foreign taxes paid.