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Definition of Foreign Source for Form 1116 for Cap Gains

Technical topics regarding tax preparation.
#1
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TP receives a 1099 that states he has foreign source dividends. This seems easy enough to report, but I was wondering: what is the definition of foreign source income? If you have capital gain distributions from a foreign source, they are included in the Form 1116 calculation, but what if you sell the US based International Mutual Fund that generates a taxable capital gain? Is this foreign source income? If not, why? How come capital gain distributions are treated differently than sale of stock? This stock is held through Charles Schwab and not from a foreign broker. Does it make a difference if it was held via foreign broker?

Apologize in advance if this is a dumb question.
 

#2
Chay  
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There is an entire Code section, section 865, devoted to source rules for sales of personal property.

I'm curious about "capital gain distributions from a foreign source". Do you mean a non-U.S. mutual fund passing through a distributive share of the long term capital gain from selling its underlying assets? I was under the impression that only regulated investment companies could qualify for this treatment, and I didn't think that this would apply to any non-U.S. funds.
Last edited by Chay on 20-Aug-2019 2:17pm, edited 1 time in total.
 

#3
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Chay, my question is much more simplistic. The 1099 provides foreign source income but excludes any capital gain distributions in the calculation. My question is two fold: do any of the capital gain distributions from these funds that generate foreign taxes paid for the foreign tax credit qualify as foreign source income for 1116 purposes. The second part of the question is: does the sale of the stock qualify as foreign source income?

For example, if you own an International Stock Fund such as say Vanguard VGTSX and it generates foreign taxes paid which can be used for the foreign tax credit, do capital gain distributions from this stock fund qualify as foreign source income? What about the capital gain from selling this stock?
 

#4
Chay  
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In your first post, you said "[i]f you have capital gain distributions from a foreign source, they are included in the Form 1116 calculation". That's what I was asking about.

As far as I know, gains that are passed through from a regulated investment company are treated the same as any other gain from the sale of personal property. So, that means we would look to section 865 to answer both parts of your question.
 

#5
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Thanks Chay. I was looking up code section 895 and not 865! Much clarity provided. Thank you.
 

#6
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In what scenario would capital gain distributions be considered foreign source?
 

#7
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In what scenario would capital gain distributions be considered foreign source? If capital gain distributions are not ever considered foreign source why would Lacerte allow such an option?
 

#8
Chay  
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Just read section 865. That will tell you everything you need to know.
 

#9
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I am not sure, but I think REITs may sometimes sell foreign real estate which generates foreign source income under 862(a)(5), which can then be treated as foreign source capital gain distributions.
 

#10
Chay  
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Right, that makes sense. I wonder if they provide that information in the 1099 package?
 


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