Foreign rental tax credit vs. deduction

Forum|Forum|5 years ago
March 10, 2021
5 replies
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I have a foreign rental property where I need to pay a wealth tax. That is, I pay no taxes on the rental income, but I pay tax based on the value of the property. After all deductions, I ended up with $5000 in rental income, and I paid the foreign wealth tax of $4000. When I tried to claim a foreign tax credit, I only got a $300 tax credit despite owing $1200 in income tax on that income. I found that $3500 was removed from the rental income due to the standard deduction that I took. Thus, I owe tax on $5000 of income but can only get credit as though I paid tax on $1500 of it. Does that sound correct?

Is it possible for me to instead deduct the $4000 as rental expenses under "Other taxes" on Schedule E?

edit: According to Netherlands, the foreign tax is classified as a capital gains tax despite the way it is calculated.

Best answer by ThomasM125

The property is located in the Netherlands and is taxed in the Netherlands. It is a tax where they assume a 4% gain on the property and tax it at 30%.

You can't deduct income taxes on a rental income schedule, only property taxes. Also, you can carry forward an unused foreign tax credit, so you may get a deduction for the unused credit in future years.

rogge1722

Level 10

With regard to foreign tax credit: from Pub 514:

Taxes based on assets, such as property taxes, do not qualify for the credit.

With regard to the tax treatment for U.S. taxes, perhaps someone with expertise will provide advice.

maitreya137Author

Level 2

I should clarify. The tax is effectively a capital gains tax, so it would be a foreign income tax. I could definitely take a credit, but I would only be credited for $300 of the $4000 tax. I would get $900 if I took the deduction. How do I take a deduction? Can I subtract as a rental property expense? If I take it is a general deduction, I would get nothing since I would still take the standard deduction.

rogge1722

Level 10

I'm not sure but it raises the issue of the tax treatment for U.S. tax purposes when a property tax in the U.S. is a capital gain tax in the Netherlands. I'm inclined to think that U.S. law would prevail but again it might not. I'll defer to someone else who may know the answer.