How to avoid double taxation on a foreign real estate rental.

[maraivan]

I have had a Canadian rental home for multiple years and I always report it is explained in this response. After I finish entering everything in, the Federal and State numbers go back to exactly what they were before I started entering the Canadian real estate income. However, this year that did not happen. I have a slight gain between rental income and expenses on this home (~1k) and Turbotax is counting it as income and not equalizing the numbers. Did something change this year?

[DaveF1006]

It depends. To clarify, how did you enter the information. If there was more income, than expenses, this should be net income. it may be that you had carryover losses in the past that may have been used up this year.  As a result, there was nothing to equalize. This net income increase could be the result of many different factors.

[maraivan]

There was net income, which I expected. In previous years, Turbotax would simply take my income and my expenses and once I completed the rental section, my values for Federal and State would return to exactly what they were before I started the Rentals section. I always assumed this was the way TurboTax handled avoiding double taxation, however this year it did no do that (i.e. the numbers did not return to what they were before I started the Rentals section, they basically showed that I owe more because of the net income). I compared all my selections with last year's return and I entered everything exactly the same way so I am not sure why the application is behaving differently this year...

[ThomasM125]

You may have had a loss on the rental activity in prior years and indicated that you are not materially involved with the activity. In that case, the loss would not be deductible, so it would not have affected your income tax. 

Those losses would be carried over to future years until you had income to apply it to, however, so if that is what happened, the prior year losses would probably offset your income this year, so the taxable income is puzzling.

You need to look on your 2019 tax return and see if you have a form 8582 Passive Activity Loss Limitations. Line 4 is income from All Other Passive Activities and the allowed loss is on line 16, so the difference would be your carryover to 2020. You will see an option to enter that carryover loss amount when you go through the rental entries on your 2020 tax return.

[Carl]

To possibly simplify things, take a look at the SCH E. If line 24 is larger than line 25, then the difference is a taxable gain. Is this the case?

[maraivan]

I did have a loss in 2019 of -$839 that shows up on line 4 of form 8582. However, none of this should matter because of the tax treaty between US and Canada, correct? It is my responsibility to report my Canadian income when I do my taxes in the US, but the income cannot be taxed here (because it is already being taxed in Canada). And unfortunately, this is what is happening with TurboTax this year - it is considering my gain from my 2020 real estate income as taxable. Please correct me if my understand is wrong.

[Carl]

I did have a loss in 2019 of -$839 that shows up on line 4 of form 8582

Then all your losses were *not* allowed and carried forward to 2020. 

(because it is already being taxed in Canada).

That is not always true. I do not know the details of the US/CAN Tax treaties. The US has tax treaties with over 100 countries, and they all differ in their ways, depending on the type of income, be it passive, non-passive, and sub-categories of that. Can also depend on one's legal/VISA status.

Basically, all foreign taxes paid (income tax, property tax, practically "any" foreign tax) gets entered as such in the Estimates and Other Taxes Paid section under the Deductions and Credits tab.

Be aware also that it is not common for residential rental real estate to show a profit every year either. When you add up the deductible expenses of mortgage interest, property taxes, property insurance and include that with the depreciation you're required to take each year, those four items alone will easily exceed the total rental income received in the tax year. Add to that the other rental expenses allowed (maintenance, repairs, etc.) and you're practically guaranteed to have a loss "on paper" at tax time.So chances are, more than likely not one single penny of your rental income is taxed - at least not in the U.S.