Does someone have a worked example of filing Sch E and form 1116 for Foreign Tax Credit on rental income?

[xiaerlei]

 It is difficult to find consistent answers on instructions for lines 2, 3 and 4 of form 1116. Especially:

• What should be listed as definitely related expenses of a rental property?
• None (as I would pay management, mortgage interest, real estate taxes, ... even if I was not renting the property)
• All expenses listed on Schedule E
• All expect mortgage interest and real estate taxes (as per 1116 instructions)
• Depreciation
• What should be listed on line 3?
• Real estate tax? 
• 0, as 1116 instructions ask to take it from Schedule A (that has no real estate tax because it is on Schedule E)
• What should be listed on line 4a
• Mortgage interest
• 0, as 1116 instructions ask to take it from Schedule A (that has no interest because it is on Schedule E)
• What should be listed on line 4b
• Mortgage interest (treated as "Other interest" on Schedule E due to no form 1098 received)

[heather1]

I feel your pain. I'm not a tax professional but had an accountant handle my taxes a few years ago so I continue to repeat what he did. Note I both have rental property in Canada and own and live in a house (with mortgage and property tax payments) in Canada so my example shows where the RENTAL mortgage interest and property tax get entered on F1116 vs. where my PERSONAL mortgage interest and property tax get entered.

Here's my example...

For Definitely related expenses (Line 2) - the accountant included: mortgage interest, insurance, property taxes, management fees, maintenance, repairs, depreciation, supplies, etc. for the RENTAL. He took all the expenses from Line 20 on Sch E and entered that exact amount on Line 2 F1116 (I actually have two rental properties so he added the two amounts on Line 20 - from Col A & B - and put the total in Line 2 F1116).

Line 3a - this is where he entered the PERSONAL property tax that I paid for the house I live in (which happens to be in the same foreign country as my rental). He pulled that from Sch A Line 6. So I think why it says to take the mortgage interest from Sch A is that it's talking about mortgage interest you paid for the home you live in (if applicable), not your rental.

Line 4a - this is where my accountant entered the PERSONAL mortgage interest I paid for the house I live in (in Canada). So again, I think why it says to take the mortgage interest from Sch A is that it's talking about mortgage interest you paid for the home you live in (if you pay any), not what you paid for your rental.

Line 4b - I personally would have put the mortgage interest from my own personal home on this line (instead of Line 4a like my accountant did) because as you point out, being in Canada, I never received a F1098. I'm putting it in this line now that I'm doing my taxes myself.

Sounds like you might already be looking at the IRS' instructions for this form but if not, here they are (specific instructions start on p. 15) https://www.irs.gov/pub/irs-pdf/i1116.pdf. 

Hope this helps!

[heather1]

Or short answer... for dealing with rental income in F1116, use Sch E to populate Line as all those expenses are Definitely Related Expenses. The mortgage interest and property taxes they are referring to on Lines 3 & 4 in F1116 are for your PERSONAL mortgage interest and property (i.e. from where you live) not your rental property, that's why they'd be taken from Sch A.

Same answer as above, just realized I could have said it in two sentences!

[xiaerlei]

Thanks Heather for the detailed answer! That helps a lot.

I have 2 questions:
- the 1116 instructions say that we should not enter any interest on line 2. From your example, I guess this is just for interest paid for a loan for a home we live in. And so I should disregard this rule for interests paid for a loan for a rental. Is that what you understand too?
- but why is a home you own and live in should be put on 1116? I thought foreign tax credit was for taxes paid on income only.

Thanks for your help