In 2011, I purchased an investment property in the county of Panama. Last week I sold the property and had the net proceeds wire transferred to my Brokerage account. I do not have a bank account in Panama and the proceeds went from the buyer to the lawyer to me. The property was not my primary residence and I have a relatively small long-term capital gain.
I am trying to figure out the reporting requirements for my 2020 federal tax return (no state taxes). I have all the information on my cost basis. The purchase price including a buyer's Real Estate commission, legal fees, survey cost (acquisition expenses), and cost of the capital improvements. The selling price minus the real estate commission, legal fees, escrow fee, and a wire transfer fee. I do not need to worry about an exchange rate as the transaction was in US dollars.
I also paid a 3% capital gain tax and a 2% transfer tax to the government of Panama. Unlike the United States where the long-term capital gain/loss is determined by subtracting the basis (what I paid) from the realized amount (how much I sold it for), the 3% capital gain tax (and 2% transfer tax) is based on the gross sales price.
I believe that the 2% transfer tax is treated as an expense of the sale, reducing my taxable gain. Is this correct? Regarding the 3% capital gain tax that I paid, I believe that I will be able to claim a foreign tax credit. Is this correct? I read that the foreign tax credit may be less than the amount of the capital gain tax that I paid (some limits) which I do not understand. Will Form 1116 compute the Foreign Tax Credit?
An alternative to taking a Foreign Tax Credit, I understand that I would be able to deduct the full amount of the foreign taxes that I paid (3% capital gain tax and 2% transfer tax) on Schedule A, but I will need to itemize, which I have not done in the past few years. Will TurboTax software help me determine which of these options will lower my overall tax liability?
Form 8949 ? Once filled out, I will use the information to fill out Schedule D. Schedule D ? To calculate the capital gain. Form 1040 ? Take the capital gain amount from Schedule D and add it to my Form 1040. Form 1116 ? Foreign Tax Credit.
Am I understanding this correctly? Any correction and direction would greatly be appreciated.
Thank you.