Sold property in Panama

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  • #8163
    Hootz
    Participant

    Recently, we sold property in the country of Panama, and we have no idea how to report the sale on our 2020 federal taxes. We also might be entitled to a foreign tax credit because we paid a 3% capital gains tax (not computed as we do) and a 2% transfer tax to the government of Panama.

    Before I post the details, I wanted to see if there is anyone on this forum who has familiarity with the reporting requirements. If this is not the forum to get this information, I would appreciate if someone can suggest a forum where I can post. Thank you.

    #8200
    Kaye Thomas
    Moderator

    We’ve had little luck attracting anyone with the expertise to answer questions of this type. We’d recommend another resource if we knew of one, but we don’t. I can’t promise it will be helpful, but the IRS has a publication on foreign tax credit:

    https://www.irs.gov/pub/irs-pdf/p514.pdf

    #8202
    ruth
    Participant

    Search online for ex pat Panama taxes and you’ll find links to firms that deal with Panama taxes. Contact one of them for help.

    From my brief research it appears to me that (1) the 3% tax you paid is actually tax withheld. The Panama capital gain rate is 10%. (2) A Panama tax return is due on March 30. (3) You’ll be able to claim a foreign tax credit for the capital gain tax you paid. The credit may be less than the amount of tax you paid. See Form 1116. (4) The transfer tax is treated as an expense of sale, reducing your taxable gain.

    Please verify any and all of the above by contacting someone familiar with Panama tax because I have no experience with Panama tax.

    #8206
    Kaye Thomas
    Moderator

    Note that in connection with international taxes, the word “withheld” may have a different meaning than we’re used to. U.S. taxes withheld on wages are a partial prepayment (or overpayment) of an amount to be determined later. In international taxation, a tax described as withholding may be the actual amount owed, with no opportunity (or obligation) for future reckoning.

    #8208
    Hootz
    Participant

    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.

    Thanks again.

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