What exchange rate do I use to convert money earned on a foreign residence?
August 12, 2011
Date: 24 Jan 2009
Hi, I have a question concerning the sale of a foreign real estate property.
I am selling some real estate located outside the United States. I have to convert the sales price to U.S. dollars for U.S. tax reporting, but I'm not sure what foreign exchange rate to apply.
Several IRS publications refer to the contract date. When I signed the contract of sale, I became legally bound to sell the property at the specified amount within a specified date. I decided to sell and signed the contract based on the prevailing exchange rate on that day and think that I should use that exchange rate to calculate the U.S. dollar equivalent of the sale price. Actual closing occurred on the date specified in the contract.
I wasn't able to find any specific reference in the IRS publication and U.S. tax code. Do you think my approach is legitimate and sustainable?
Date: 6 Feb 2009
This is a more difficult question than you might think.
I wasn't able to find a reference specifically on point.
If the sale did not relate to a trade or business, the closest I could find was Revenue Ruling 1954-105, which specifically applies to sales of personal property, such as a watch, automobile or jewelry. According to that ruling, you would use the exchange rate prevailing on the date of the sale. Applying this theory to real estate, that would be the closing date. I think that makes sense, because that's the date you have control of the funds.
Since I haven't found any other reference, I can't say your conclusion is wrong. I just feel more confident with my conclusion.
In the trade or business context, Internal Revenue Code Section 988 outlines the rules for foreign currency transactions. It's pretty involved, so I'm not going to explain it in detail.
Since I'm not an expert in this area, you might want to consult with one.
We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.
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