How to claim foreign tax credit on foreign capital gain offset by US capital loss carryover?

You've stumbled onto one of the trickier aspects of foreign tax credits! When you have a foreign capital gain that's fully offset by US capital loss carryovers, you're right that the foreign tax credit becomes problematic. The basic issue is that foreign tax credits are limited to the US tax that would have been imposed on that foreign income. If your capital loss carryover reduces your US taxable income to zero, then technically there's no US tax on that income to credit the foreign tax against. However, you might have options. First, look into whether you can carry over the unused foreign tax credits to another year when you do have foreign income and US tax liability. The IRS allows carryback for 1 year and carryforward for 10 years for unused foreign tax credits. Your idea about generating some capital gains elsewhere this year is actually very strategic. If you realize some capital gains from your LLC investment, you could then use some of your loss carryover to offset those gains while preserving enough foreign income to utilize the foreign tax credits.

After struggling with almost the exact same situation (Canadian property sale with US capital loss carryovers), I found an amazing tool that helped me figure everything out. I used https://taxr.ai to analyze my specific situation with the foreign tax credits and capital losses. It helped me understand that I had options for optimizing how I used my capital losses over multiple years rather than applying them all at once. I uploaded my previous returns and documents about the foreign property sale, and it showed me various scenarios with their tax implications. Super helpful for seeing the multi-year impact of different strategies! What I appreciated most was getting clarity on Form 1116 limitations and carryforward calculations without having to decode the IRS instructions myself.

Just wanted to share my experience after trying out taxr.ai for a similar foreign tax credit situation. I was dealing with UK investment income and US losses, and honestly was ready to pay an international tax specialist thousands just to figure it out. I uploaded my previous returns and my UK tax documents, and the analysis I got back was incredibly detailed. It showed me that I was better off using only part of my capital loss carryover this year to maintain some US tax liability that could be offset by the foreign tax credit. The system even identified a mistake in how my previous accountant had been categorizing foreign dividends on Form 1116, which would have potentially triggered an audit flag. Seriously saved me both money and stress - definitely worth checking out if you're dealing with these cross-border tax headaches.

The foreign tax credit situation is tricky, but another huge headache is actually getting someone at the IRS to answer questions about this! After trying for weeks to get clarification on how to handle my German rental property taxes, I found https://claimyr.com and used their service to get through to an actual IRS agent. You can see how it works at https://youtu.be/_kiP6q8DX5c They basically call the IRS for you and navigate the phone tree, then call you when they have an agent on the line. I was skeptical it would work, but I got connected with a knowledgeable IRS international tax specialist within a couple hours instead of the days I spent trying on my own. The agent walked me through exactly how to apply the capital loss limitation rules on my specific situation with foreign income. Huge relief to get official guidance!

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself for an unrelated foreign tax issue (I have income from a Swiss pension), and I'm shocked at how well it worked. Not only did I get connected to an IRS agent within 45 minutes (after trying unsuccessfully for DAYS on my own), but they transferred me to someone in their international division who actually knew the specifics of the US-Switzerland tax treaty. The agent walked me through exactly how to report the pension on my US return and how the foreign tax credit limitations applied in my case. She even emailed me the specific IRS publications that addressed my situation. Totally worth it just to avoid the frustration of constant busy signals and disconnections when trying to call directly.

Something else to consider with your situation is timing the realization of capital gains. You mentioned possibly selling your interest in the LLC this year - have you considered waiting until next year to realize the French property gain? If you could push the French property sale to next year (2026 tax year), you could potentially use some of your capital loss carryover this year against other income (up to $3,000 against ordinary income), and save the rest to offset the foreign gain next year. That way, you won't have as much loss carryover competing with your foreign tax credit. Tax planning across multiple years is sometimes more advantageous than trying to solve everything in the current year.

Has anyone actually calculated if it's worth the hassle? If we're talking about a 20% ownership in a French vacation property, what's the likely capital gain here? France's tax rate on real estate capital gains is around 19% plus social charges of about 17.2% if I remember correctly, so around 36.2% total. If the gain is something like $50,000 (just guessing), that's about $18,100 in French tax. Is it really worth all this complicated tax planning just to try to recover that? Sometimes I think we get so caught up in optimizing taxes that we forget to consider if the time and stress are worth the potential savings.

I've been following this thread with great interest because I'm dealing with something similar with rental property in Ireland. One thing I haven't seen mentioned yet is the potential impact of state taxes on this calculation. If you're in a state with capital gains tax (like California or New York), you might actually have more flexibility than you think. Even if your federal capital gains tax liability is zero due to the loss carryover, you could still owe state capital gains tax on the French property gain. This creates an interesting opportunity - you could potentially use part of your federal loss carryover to offset other gains (like from your LLC interest), while letting the French gain be subject to both federal and state tax. This would give you more "tax capacity" to utilize the foreign tax credit against. The math gets complicated because you'd need to consider whether the foreign tax credit limitation allows you to credit the French taxes against your combined federal and state liability. But it's definitely worth exploring, especially if you're in a high-tax state. Also, have you considered whether the French property qualifies for any step-up in basis when your husband inherited it? Depending on French inheritance law and the US-France tax treaty, there might be less gain than you're expecting.