I have a similar but somewhat different situation for which I am at a loss. Canada, where we own a condo that has been rented out for several years, has a law that when you change use of a property from rental to personal it is a "deemed sale", where you must pay the capital gains and recapture of Capital Cost Allowances (Canadian style depreciation) as if you sold the property and repurchased it. We are changing it to our second home this year so that applies to us. Under the Canadian/US treaty we can ask the US to act as if we sold it and pay cap gain taxes this year, taking the foreign tax credit for the taxes of the deemed sale, but it is not in our interest to do so because of NYS taxes and some other issues.
So we are paying a lot of cap gains to Canada this year and claiming no credit, as except for that treaty provisions the US does not recognize deemed sales. However, we are also going to be paying a lot of Cap Cost recapture, and that gets lumped in on the regular Canadian return where we report rental income. How do we figure out how much Foreign tax to report on our US return for credit? We are only reporting the rental income as income received to the US, but the taxes we pay on that rental income will be in a higher bracket because of all the CCA recapture lumped in with it on the return.
My thoughts would be to redo the Canadian return to calculate as if we just had rental income, and use that number. Or perhaps prorate the entire thing by the percentage of income that is rental?
Thanks for any advice
