On form 1116 for foreign rental income is the value for gross income the income received from renters or the income I receive after expenses i.e. the income I have paid foreign taxes on?
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The value for gross income is the income received from your renters, without deducting for expenses. You’ll enter this in Part I, line 1a, Gross income from sources within country shown above and of the type checked above.
In Lines 1a and 1b—Foreign Gross Income in the 2021 Instructions for Form 1116, the IRS states:
Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i. You must include income even if it isn't taxable by that foreign country.
You can then enter your expenses related to the rental income in the Deductions and losses section of Form 1116, Part I.
The value for gross income is the income received from your renters, without deducting for expenses. You’ll enter this in Part I, line 1a, Gross income from sources within country shown above and of the type checked above.
In Lines 1a and 1b—Foreign Gross Income in the 2021 Instructions for Form 1116, the IRS states:
Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line i. You must include income even if it isn't taxable by that foreign country.
You can then enter your expenses related to the rental income in the Deductions and losses section of Form 1116, Part I.
Thank you. Can you confirm depreciation should NOT be included on form 1116 but only included on schedule E.
To clarify, did you pay the foreign tax on the amount of rents you received without any expense considerations?
I paid tax on the net income : rent less expenses. Depreciation was not included in the equation like it is in the US.
In viewing the form 1116, there is no separate entry for depreciation. In fact if you look at Part 1 line 2, all of the expenses definitely related to income are the expenses that the foreign country used to reduce the income for determining the foreign taxes you owe. If it wasn't included as an an expense, then it can't be claimed.
At least though, you will be able to claim it on Schedule E for US income tax purposes.
If I am not allowed to deduct the expenses (e.g. utilities, management fees, etc.) from the rental income I receive from a property located in Spain while paying the foreign taxes, should I still add those expenses to line 2 (expenses definitely related) of form 1116? Thank you
Yes
Be careful if you do this because if you deduct expenses on Form 1116, this will reduce your foreign income credit because it reduces your foreign income reported on Form 1116.
The foreign income credit is derived from a ratio of foreign income divided by total income in your return. This ratio is then multiplied by the amount of tax liability reported on line 18 of your 1040.
If Foreign income is reduced, then the ratio is reduced as well resulting in a reduction in the Foreign Tax Credit. This is probably one case scenario where a deduction will hinder rather than help you if you are unable to itemize deductions in your return.
Hi,
I am in the same case. I paid taxes for a rental income in Spain, but can't deduct any expenses when reporting the income and paying taxes. If you earn 10,000 from your rental you pay %24 of 10,000 on taxes. So, do I have to put the expenses claimed in Schedule E in the 1116 form even if in Spain were not claimed?
Thank you
Yes, you would enter the rental income and expenses in Schedule E. When entering the information for the foreign tax credit (FTC), you would record the full $10,000 amount as Gross income and you would not enter any expenses in this section.
The Gross income amount you report in the FTC is already reported in Schedule E thus not reported twice as income in your return. It is used as a reference point on what income your foreign tax was based on and used as a calculation in determining your foreign tax credit for the year.
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