Foreign Real Estate


Just learned that taxpayer owned a house in Bolivia. She emigrated
from that country many years ago and is a longstanding US resident and
citizen. The house was built by her family in stages over time before
she moved to the US. Additional improvements were made to the house
and ownership eventually passed to her. It?s unclear whether she
became owner before moving to the US and becoming a citizen. Any
paper trail with all legal and financial documents remains in Bolivia.
During her time as a US resident and citizen, she would occasionally
use the house during visits with her family. It has been primarily
occupied by a house sitter although it was occasionally rented. Real
estate taxes were paid annually. No rental income has ever been
reported, nor has any depreciation ever been claimed. It isn?t quite
clear how to determine the basis of this property. In Nov 2009 it was
sold for $180,000, with commission and taxes of $10,000.
Where to start? Although it?s tempting to do otherwise, since no
documentation would have gone to the IRS, I assume the gain from this
sale, if any, is reportable. Not sure if it?s worth the time and
effort to reconstruct the rental property history? Could she have
been claiming a foreign tax credit for the real estate taxes paid?
Ideas and suggestions warmly appreciated.
Reply to
R. Pile
The gain from the sale would be taxable. The IRS would be happy with a $0 basis. Perhaps a conversation with the client would elucidate some cost history and whether she inherited the house or if it was effectively gifted to her. Inheritance would put a definite time at which to recreate a value. One approach would be to see if you can find any data on a Bolivian GDP or real estate deflator, and reduce the sale price to the earlier time using that data, and convert to dollars at the then-existing exchange rate. Failing that, use the US real estate deflator and adjust for exchange rate differentials.
She should not have been claiming a foreign tax credit on real estate taxes paid; that only applies to income taxes.
A few years ago I had to do 6 years of returns for a CPA-JD client (had had major depression for a long time), and had to reconstruct basis on a vacation home he had sold in one of those years. I was able to look up the original cost on the assessor web site for the county it was located in, plus his assertion of about what he had paid for the improvements since then. Was able to get penalties waived; IRS otherwise accepted the return as filed.
Reply to
Tom Healy CPA
What did you do about depreciation? It has to be recaptured, and deducted for all of the 6 years, but you can only amend for 3 years, and 4 on state. Of course, if there was a loss even before depreciation and passive activity rules prevent you from taking the loss if your income is over 150k, then it's not an issue.
Reply to
removeps-groups
"What did you do about depreciation? "
Depreciation would be 40-yr ADS applied to the basis after allocating land value (predominant use outside US). Therefore, the impact of the omitted prior years' depreciation should be minimal.
You could consider filing Form 3115 and make a sect 481 adjustment to take the deduction for the allowable depreciation in the year of disposition. See Rev. Proc. 2001-11 as amended by Rev. Proc. 2007-16. There may be a later relevant guidance.
Reply to
Richard Di Bernardo, CPA

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