Thank you again @jtax
By no means I am under the impression that the FTC is designed to let one recoup foreign taxes, and this is not what the example I presented was showing. The example is showing that the US taxes that are being paid on the foreign interest income are not being recouped as a result of the "unallowed" foreign rental property losses showing as an expense in Form 1116. Is this making sense?
As for your comment "But the PAL is merely suspended. You get to take that when you have other passive gains or when you sell the property. That is just a timing issue." This is not a given, one might never sell the property or not have other passive gains.
There is also the depreciation recapture, which effectively treats this by lowering the property's basis by depreciation. Therefore, one could argue that any reduced US tax liability due to depreciation will be paid back at the time of the sale. Given that the lowered basis already takes depreciation into account, I am not sure how it makes sense to also include it as an expense on Line 2, 1116.
