Is rental income on property outside the US taxed in 2018? Are related expenses deductible in the US tax return, even if the property doesn't earn income in 2018?

[spellice]

Also, what taxes will need to be paid when selling the property? What version of Turbo tax should I use in 2018 to handle tax on foreign property income and expenses?

[Carl]

Yes, it's taxable. But depending on your situation, more than likely after taking the required depreciation, deducting the allowed mortgage interest and other allowed rental expenses are deducted, on paper you end up with a loss. commonly all those losses effectively zero out your taxable rental income with the excess loss carried over to the next year. So it's not at all uncommon for the unrealized losses to carry over and increase year to year.

Now foreign rental property is depreciated over 40 years, unlike domestic rental property which depreciates over 27.5 years. So depending on your cost basis for depreciation it is possible to show taxable rental income when dealing with foreign rental property. But regardless, all rental income from all sources, foreign or domestic, is reportable on your U.S. federal tax return.

Now if your foreign rental shows a profit and you paid taxes on that foreign rental income, it may be possible to lower your taxes on that foreign income, or eliminate them completely if you qualify for the Foreign Income Tax Exclusion. But that's dealt with in a completely separate section of the program and not on SCH E directly.

[SweetieJean]

"Are related expenses deductible in the US tax return, even if the property doesn't earn income in 2018"  So you are not renting it out in 2018?

[Carl]

All rental expenses are claimed. Period. Weather they're deductible or not, depends on if you have the rental income from which you deduct them.
Remember, rental income and rental expenses are passive. You can only deduct your rental expenses from that passive rental income. Once that gets your taxable rental income to zero, the remainder is carried over to the next year.

[spellice]

Thanks, property is not rented yet

[Carl]

So long as you don't live in the property for one single day as your primary residence, then it's classified as rental real estate from day one. Doesn't matter if it takes you six months to actually get a renter in it.
So if you purchase the property as an investment property with the intent of renting it out, and it takes you a few months to do repairs an get it rent/move-in ready, then another few months of advertising before you actually get a renter in it, that's fine. It's still classified as residential rental real estate from the date you purchased it.

[spellice]

Thank you, Carl! And the day I sell, do I pay taxes on the difference between sale price and purchase price? What happens to any potential accumulated losses on the rental?

[Carl]

In the year you sell, rental losses are not restricted to the passive rental income, and are taken against what is referred to as "ordinary income", with any gains on the sale being reduced by those losses first.
For some more detail, in the year you sell all prior depreciation is recaptured and taxed in that year of sale. It's taxed no matter what and there's no way out of it unless you sell at a loss. So if you do sell at a gain that depreciation recapture has the potential to increase your taxable gain even more. However, even if you qualify for the "lived in two of last five years" capital gains tax exclusion, you will still be taxed on the recaptured depreciation. There's just no way out of that when the property is sold at a gain.
Many times when people are selling rental property and they're selling for a bit less than they paid for it, they're shocked when they see a taxable gain. That's the tax on all that recaptured depreciation kicking in. Here's an extremely rough example using just basic numbers. (Not all inclusive, just making the point here.)
 - Purchased property in 2001 for $80,000.
 - Rented it out since purchase over the last 17 years and in 2017 have a total accumulated depreciation of $43,000.
 - In 2018 sold the property for $60,000. I have a $23,000 taxable gain.
That's because the $43K of depreciation reduces my original cost basis of $80,000, to $37,000. So selling for $60,000 gives me a taxable gain of $23K. I'm paying taxes on that $23K weather I like it or not. If that recaptured depreciation puts me in a higher tax bracket, then I'm also paying a higher tax rate on *all* of my taxable income from all sources.

[deadman]

Would you mind answering <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4725368">https://ttlc.intuit.com/questions/4725368</a> as well?