Sale of Foreign Home

[DaveO]

Taxpayer is a US resident. He bought a second home in Europe, which he paid for in Euros. He is planning to sell the home this year. He will recognize a capital gain on the sale and will pay taxes in Euros on the gain. He will also realize a gain due to the rise of the Euro against the dollar. Is this gain taxable? He is not a currency trader. What if he doesn’t convert the Euros to dollars and just leaves the money in a European bank? I know I need to report the gain and figure his foreign tax credit on form 1116. I’m not sure if the gain due to the change in relative values of the currencies represents an additional taxable gain or not.

[erchess]

I have nothing to base this on

but I do not believe that he has to pay tax on the currency gain. I believe that you simply convert purchase and sale prices to dollars at the rates in effect on the relevant dates and as you noted also do the foreign tax credit.

[Bill Tubbs]

currency gain included in gain of sale

but I do not believe that he has to pay tax on the currency gain. I believe that you simply convert purchase and sale prices to dollars at the rates in effect on the relevant dates and as you noted also do the foreign tax credit.

If you convert both the purchase and sale prices from Euros into Dollars, you are actually taking into account the gain on the currency itself (which I believe is the proper treatment). You would not have an additional currency gain to report -- just the sale of the house.

BIll

[Corduroy Frog]

Yes - but Interest

DaveO, yes your reportable income includes the gain from the foreign currency increase, but that portion is reportable as interest income. If the foreign currency value had dropped, this would be reportable as interest expense.

Assume you paid 50,000 Euros five years ago at $1.00, meaning your basis is $50,000 in US dollars. Then you sold this property in 2007 for $70,000 at $1.25, or $87,500. Your total income is $37,500, but the portion attributable to foreign translation is .25 X 50000, or $12,500. The other $25,000 is capital gains.

A loss on translation is interest expense. It is NOT mortgage interest, so I'm supposing this should be deducted on Form 4952.

And the portion attributable to increase (decrease) in currency must be only that portion representing the change in currency translation. There are also exchange "fees" for exchanging currency at the front end and back end that are nothing more than elements of basis.

There are qualifiers - the transaction MUST be closed (completed) - no partial recognition on transactions not realized. The base currency must be the same domicile as the taxpayer, etc.

And there are exceptions. See Code and Regulations - Section 988.

[DaveO]

Thanks to all

Corduroy Frog, I hadn't considered that it would be interest. It didn't seem like a capital gain as currency is not a capital asset. I'll read the code section you cited.