How do I get a foreign tax credit to apply against my rental property overseas

[CesarJ]

To apply the Foreign Tax Credit for rental property income overseas, you generally need to claim the taxes paid to the foreign country on the rental income. In TurboTax Online, after entering your rental income and expenses for the overseas property, navigate to the Foreign Tax Credit section under Deductions & Credits.

Steps:
1. Enter all rental income and expenses related to your foreign rental property.
2. In the Deductions & Credits section, find and select Foreign Tax Credit.
3. Choose to Take a Credit for foreign taxes paid.
4. Complete Form 1116 with details about your foreign taxes paid on rental income.

Form 1116 calculates your allowable Foreign Tax Credit to offset U.S. taxes on that income. The credit prevents double taxation of your rental income earned overseas.

It's important to note that the credit can only reduce your U.S. tax owed on foreign income and can't exceed that amount.

[egen3000]

There's a problem with this mechanism.  when entering the data associated with the foreign rental tax, you are asked to pick a category. The only category fitting rental income is "passive" category. Unfortunately, someone in their infinite wisdom decided that foreign financial assets belong in the same category, AND therefore they also decided in their infinite wisdom to pull in completely unrelated domestic investment interest expenses from Schedule A as "definitely related".

Generally, the 1116 worksheet is challenging, i get that. It pulls all income and expenses in the entire TR to figure out the ratio of US tax to foreign tax, to figure out how to limit the foreign tax credit. However, the domestic investment interest expense is pulled in as "definitely related" at 100% impact, without giving you an opportunity to object. You are notified that this is happening, and if you have an issue you can go back to "deductions", but there's really nothing you can do in the "deductions".

In addition, during smartcheck i got asked to fill in a basis for the non-existent financial asset for this item. some people say to enter 0 or 1 as the basis but that makes no sense. I shouldn't have to enter any basis whats o ever for non-existent items...

I tried to remove the domestic investment interest expense manually from the 1116 worksheet itself in "forms mode", but the software doesn't allow me to erase the number. It also doesn't allow me to change the ratio of its impact from 100% to whatever % was calculated for non-related expenses. Perhaps the workaround is to do the entire 1116 worksheet in forms mode, although the code might try to still force the investment interest expense into the form when i get back to step-by-step mode. 

Appreciate any thoughts about a workaround until this is fixed.

[CatinaT1]

Because they both fall into the Passive Category, TurboTax tries to link them, which reduces your credit limit.

You can try this in the Interview mode:

1. Navigate back to the Foreign Tax Credit section.
2. Proceed past the income entries to the screen titled Lessor Common Exemptions or Foreign History.
3. Look for a screen titled Directly Related Expenses or Deductions Allocated to Foreign Income.
4. There should be a field here to manually adjust or override the amount of interest expense allocated to the foreign source. By manually entering $0 for interest related to the rental, you should be able to move that expense into the 'not definitely related' bucket, which preserves your credit limit. For the Basis error in Smart Check, entering 1 is a common workaround to satisfy the software's ratio calculation without changing your tax outcome.

If that doesn't work, go to Forms mode and try this:

1. Open the Foreign Tax Credit Compilation Worksheet.
2. Find the section for Interest Expense or Apportionment.
3. Look for the line that pulls from Form 4952 (Investment Interest).
4. You can right-click and select Override on this worksheet to set it to $0. This will flow forward and fix the math on Form 1116.