I have a foreign rental property. This year due to renovation expenses and depreciation I had an income loss. Nevertheless I paid income taxes abroad because there I could not deduct the renovation costs as deduction.
When I fill the form 1116 to get a foreign tax credit, if I copy the values from schedule E (adding the renovation expenses and the depreciation) I end up with zero foreign credit, which does not seem correct to me, since I did pay taxes abroad.
I get confused on the Line 2 of Form 1116, where it asks for the "definitely related" expenses. Should I include the renovation expenses and the depreciation?
If I do so, the foreign tax credit becomes zero, which is counter-intuitive to me since the renovation costs are effective costs I sustained and I don't understand why it reduces my foreign tax credit.
Thanks
Unfortunately, you will not receive foreign credit on your rental as you have a loss situation for US tax purposes even though you paid tax on the rental in a foreign country.
Line 2. For Definitely related expenses - you would include mortgage interest, insurance, property taxes, management fees, maintenance, repairs, depreciation, supplies, etc. for the RENTAL. all the expenses from Line 20 on Sch E and enter that amount on Line 2 F1116
The depreciation helps postpone the tax on the gain from the rental of foreign property until it is sold out so essentially it is a tax that is postponed for later. On the other hand, being applied as a deduction now reduces the gain significantly and the tax credit is always less than the taxes paid abroad. I do not think the tax credit can be carried over for more than ten years so it can not be used to offset the gain from selling the real estate in ie 30 years. Furthermore, the same thing happens every year so the foreign tax credit can never be claimed. If this is the case it is not reasonable to consider depreciation a "definitely related" expense for 1116