My sister is a US citizen. She is going to sell her apartment in Russia. She knows that according to the US tax treaty with Russia this part of her income will not be taxable in the US (Income tax convention with Russian Federation, Article 9) as well as she has to report her worldwide income in US. Which IRS tax forms would she have to fill out (please list the IRS tax form numbers) and which supporting documents would she bring from Russia for that?

ANSWER

The BIDaWIZ Team's Answer:

You are correct that your sister must file a US tax return. There are two key concepts to understand with foreign treaties: 1) Generally US Citizens are taxed on their worldwide income and 2) the general purpose of tax treaties is to mitigate double taxation for the taxpayer. If you read the bottom of the first page of the treaty between the US and Russia, it states, "Capital gains on assets other than real property would be taxable only in the country of residence of the person deriving the gain. (Such gains are dealt with in the residual article on "other income" which provides for exclusive taxation at residence of income not effectively connected with a place of business in the other country.) Gains with respect to real property may be taxed where the property is located." Then, if you go to article 9 it goes into more details regarding the taxation of real property. However, if your sister meets the requirements to be eligible for the capital gains exclusion of up to $250,000 & $500,000 for joint filer, then she won't be liable for US taxes on the sale. If the gain is in excess of that amount, it will need to be reported on Schedule D of her 1040. Form 1116 is used to obtain a foreign tax credit for any taxes paid in Russia. The tax treaty clearly states that your sister may be liable for Russian taxes on the gain. If that is the case, she can claim the foreign tax credit via form 1116. The foreign earned income exclusion applies to earned income which would not be applicable for the sale of real property but your sister's other income and expenses might be eligible. Specifically, the exclusion is up to $92,900 ($195,800 if married and filing jointly) for foreign earned income in 2011. She can compute her foreign earned income exclusion amount on Form 2555, of her Form 1040. Please note that the due date to file this form for the 2011 tax year was June 15th, 2012, so she should file as soon as possible unless you are referring to the 2012 tax year. In terms of supporting documentation, she would need receipts for all expenses claimed as well as the deed detailing the purchase price of the home and supporting documentation for the sale of the home, including any improvements made to it.