Kaye and Ruth, thank you for your posts. I am starting to piece this together, but I have more work to do.
A 3% capital gains tax was taken at the closing (The Panamanian attorney paid it prior to the closing). Unlike in the US, it is taken on the sales price. Regarding the 10% on the internet, it dos not really work this way in practice. This is from a “Zonian” friend who owns a real estate company in Panama City.
“You bought a property for $70,000 (on paper) and sold it for $80,000 just a couple of years later.
Your old capital gains taxes would have been figured as 10% of $10,000 (the difference between your purchase price and sales price) which would have resulted in capital gains taxes of $1,000.00
The current capital gains situation would require to pay the 3% of the sales price in advance… that being $2,400.
When you fill out the capital gains tax form you can leave the option open to ask for the reimbursement, which in this case would be $1,400…. and if you’re lucky and diligent you should get it in 3 or 4 years.”
In addition to claiming a foreign tax credit for the 3% capital gain tax I paid, I was hoping I could do the same for the 2% transfer tax that I also paid at closing. I think Ruth is probably right that it is treated as an expense of sale (no big deal because I do not have a large gain), like the real estate commission and attorney fees that I paid, reducing my taxable gain. I will have to dig deeper into Form 1116 and hopefully, it will be fairly straightforward.
Besides form 1116, my guess on the forms needed to report the sale are Form 8949 to report the cap gain, and this gets carried over into Schedule D and ultimately to the 1040.