Foreign real estate rental: What should I put for line 1a of 1116 Foreign Tax Credit worksheet? The total rents or net income after expenses?

greatkhural · ‎June 5, 2019

In 2016 I had foreign (Canadian) real estate rental income, which I duly entered on Schedule E per guidelines. After depreciation this resulted in a net loss of about $900 on my U.S. tax return.

In Canada I filed a section 216 return. Since depreciation was not claimed as an expense in Canada, my net income on the property was positive on the Canadian side. For this income, I paid around $800 in Canadian taxes.

My question is - on form 1116 foreign tax credit, what do I enter box 1a "Gross income from sources within country shown above..."? Is it the gross income from rents collected before expenses or the net income (loss)? And if the latter, in the event of a loss, do I simply enter zero or enter a negative number?

Additionally, what should I enter in box 3d "Gross foreign income"?

pk · ‎June 5, 2019

Assuming that you are a US citizen/ resident, I would use the simpler approach of expensing all the taxes associated with this rental income ( property taxes , income tax , other city / local taxes etc. ) under the taxes paid on schedule -E and thus avoid the requirement for form 1116. Thus my gross rental income would still be the gross rents in and therefore match with foreign filings and represent actual rents received.

You are aware that foreign rental real-estate is depreciated different than domestic real-estate ( 40 years vs. 27 years -- Turbo takes care of that if it knows that the property is in a foreign country ) .

I hope this helps.

greatkhural · ‎June 5, 2019

If you add the foreign tax as a line item under Schedule E expenses, it becomes, in essence, a deduction from net income, in which case you are getting a refund at the marginal tax rate on the amount you accrued in foreign taxes. However, a credit in this case refunds you 100% value of the foreign taxes you paid. This is a big difference.

pk · ‎June 5, 2019

Foreign tax credit is not doallar for dollar -- it is allocated based on ratio of foreign earnings and total world earnings. Any unallowed portion goes into a holding mode to be used against future or past foreign earnings and taxation thereof. You can also recognize the foreign taxes paid as a deduction if you itemize.. Just work through the program and TurboTax will guide and provide results -- you can play with different ways and choose one that is most advantagous to your case --

Foreign real estate rental: What should I put for line 1a of 1116 Foreign Tax Credit worksheet? The total rents or net income after expenses?

Investors & landlords

Investors & landlords

Investors & landlords