Form 1116 rental expenses entry question

[patamelia]

I am confused. I have 2 1116 forms. One for general category income:pensions and annuities and one for dividend, interest and rental income.I filled out Schedule E with all the necessary information.

If I include the rental expenses then it doesn't use the old tax credits and I owe about $500. There is loss on line 17 which is negative foreign source taxable income and it is less than zero- so you have no foreign tax credit for passive income.

If I don't include the rental expenses on the 1116, then it uses the carryback or carryover taxes from 2012-2107 and the taxes are available for credit. Then I owe no taxes for 2018.

I found an entry by Turbotax saying to not enter the expenses twice which I am including. What is correct? If the expenses must be added on the 1116, then is there a way force the old credits to be used?

Entry: foreign tax credit section?

This may be more of a software question. I'm taking the foreign tax credit for rental income. Do I enter rental expenses (management, insurance, etc) in the rental income section and again in the forWhere do I enter expenses pertaining to a rental property? In the rentals section or in the feign tax credit section? Both places prompt you for expenses. If not, where is most advantageous to claim them?

Answer:

DO NOT enter anything in the program TWICE ... rental expenses go on the Sch E only.

And based on the number of postings you really should seek professional assistance with this confusing topic.

[pk]

@patamelia

Having read through all of the above post, I would like to first clarify the situation --

(a) you have  unused foreign tax credit (yes?)

(b) you have foreign passive income such as dividend income  where you have paid foreign taxes  -- perhaps mutual funds -- (yes? )

(c) you have rental income from foreign source ( yes?)  -- need details of the country involved, rental  property  details , like type of property ( residential, farmland , commercial  etc. );  is this your first year with foreign rental income ?

(e) what are you trying to achieve ?

[patamelia]

a)yes more than enough b) passive:interest,dividend,rental income and general:pensions c) resident of Germany, residental apartment, not first year e) trying to use Foreign Tax Credit Carryovers

[pk]

 Your rental gross income and expenses , including depreciation , are entered on Schedule -E -- this is true whether Rental Property  is in the USA or abroad.  The only difference is that Residential Rental property in the USA are depreciated over 27.5 years whereas the international Residential are depreciated over 39.5 years.

A net profit from Rental operations is taxed as ordinary income and losses are allowed up to the limit of Passive Activity Loss Limitation.

If you do have Net Positive income from International Rental, that income is still foreign sourced and therefore can be used a foreign income for purposes of  1116. -- quenching carried over foreign tax credit.   You do not report gross income and expenses on form 1116.

Does this make sense  or ?

[patamelia]

@ChampChiran

Unfortunately, I only found your June 2019 answer today and my taxes were already sent off  last May.

I still have the same problem this year.  In 2018, I had to pay full US taxes since I had $0 taxes in Germany to offset with. I  filled out form 1116 for Interest+Dividend+Rental Passive Income and SchE for rental income, which resulted in a loss.  On 1116,  I entered rental income and expenses which I think is required.

You said reporting on 1116 was incorrect: You do not report gross income and expenses on form 1116.

In any event, I had $0 taxes to credit with and  I had $2938 passive tax credits summed from 2012.

I couldn't use any carryover because of $0 Foreign taxes.

In this year 2019, I have $2238 foreign passive taxes additional minus $574 passive taxes utilized and plus $2938= $4602.

How can I carryback my  passive taxes from 2019, $1664 available- I need $623 for 2018.  I know I need 1040X, but I can't redo 1116-2018 since Turbotax didn't take the original carryfoward of $2938.  I carried over 2018 Turbotax info into 2019, but it didn't carryback anything to 2018 and generate needed forms.

Or should I really redo 2018-1116 and not enter rental income and expenses???

I hope you have access to our exchange from June 7, 2019 3:18 PM.

Thanks for you help or anyone else who can help.

[patamelia]

@pk

Unfortunately, I only found your June 2019 answer today and my taxes were already sent off  last May.

I still have the same problem this year.  In 2018, I had to pay full US taxes since I had $0 taxes in Germany to offset with. I  filled out form 1116 for Interest+Dividend+Rental Passive Income and SchE for rental income, which resulted in a loss.  On 1116,  I entered rental income and expenses which I think is required.

You said reporting on 1116 was incorrect: You do not report gross income and expenses on form 1116.

In any event, I had $0 taxes to credit with and  I had $2938 passive tax credits summed from 2012.

I couldn't use any carryover because of $0 Foreign taxes.

In this year 2019, I have $2238 foreign passive taxes additional minus $574 passive taxes utilized and plus $2938= $4602.

How can I carryback my  passive taxes from 2019, $1664 available- I need $623 for 2018.  I know I need 1040X, but I can't redo 1116-2018 since Turbotax didn't take the original carryfoward of $2938.  I carried over 2018 Turbotax info into 2019, but it didn't carryback anything to 2018 and generate needed forms.

Or should I really redo 2018-1116 and not enter rental income and expenses???

I hope you have access to our exchange from June 7, 2019 3:18 PM.

Thanks for you help or anyone else who can help.

[pk]

@patamelia  first apologies for delay in my response -- please forgive.  Second, to my mind the best option would be to amend  and thereby clean up your earlier returns. It is more painful but thereby you would have a clearer picture of the actual situation from the IRS/US perspective and be able to withstand any future challenges ( if any ) from the IRS.  Third, I am hoping that you are using the desktop version of both 2018 and 2019 -- this will ease the burden because you can actually see all the  worksheets and forms  and therefore  are  more aware  of what is actually going on--plus everything is on your machine and available   ( this is my very personal preference/ view, especially in complex situations  where educated intervention may be required ).

Does this help or ??

[patamelia]

@pk

Thanks for trying to help. I don't know what I should cleanup on 2018 or 2019. I think now that

the problem in 2018 was that I paid no foreign taxes and also had a rental loss that resulted

in line 17 on form 1116 being negative.

This means I can't take credit for that year 2018. Someone else in the Community pointed that out. They also meant that I can't carry back from 2019 to 2018, that is also probably correct. Otherwise there would have been a carryfoward in 2018, which didn't occur.

I have the Desktop version of Turbotax 2018 and 2019 and will review everything.

Thanks again.

[pk]

@patamelia , sorry perhaps my reply was not specific enough.  What I am talking about here is this :

(a) since you filed 2018 return with foreign rental income and expenses on form 1116, you need to correct that i.e.  amend 2018 to show your rental income/expenses on Schedule-E  ( note that your depreciation for the foreign property needs to follow "foreign residential rental property " rules current for 2018 start of renting ).  This also means  that while net rental income/loss is subject to Passive Activity Loss Limitation for US purposes, this doe not flow to  form 1116.   It also means  that the net foreign income  as used by the foreign taxing authority ( which country please  ) can now be treated as foreign income and any income taxes on that income is eligible for foreign tax credit.  Thus doing this amendment you have the return as per current tax laws

(b) once this 2018 is done then you can have the foreign tax credits for this passive category can be used for 2019 and beyond -- note  that unused foreign credits by category can be taken back one year and forward for 10 years ( the catch is you must have foreign income to use this ).  The other way is to use this as deduction when you itemize.

Does this help or am I still in the left field , as far your case is concerned ?

[patamelia]

@pk

I think my case is a little complicated , but I am sure that my taxes have been filed correctly.

I paid my US tax consultant here in Germany a lot of money to do my returns and it got to be just too expensive. For the last years, I have been doing everything exactly as this tax guy set up. And I use Turbotax now. Nothing has changed with my earnings since I started doing my own returns.

I file MFS, so I loose out on a lot of deductions (even worse than single). Every year I fill out a Schedule E and put the rents received on line3 and the expenses summed up in line 16. Then I enter the rental income as part of passive income on 1116- line 1a and the rental expenses on line 2.

The purpose of 1116 is just to figure out the creditable taxes. The rental income is reported on 1040 from ScheduleE.

I now wanted to know how to carryback passive taxes from 2019 to 2018. I believe that due to paying $0 German taxes in 2018 and having a negative value on line 17 of 1116 that I couldn't use the carryfoward credit in 2018, that was my original post. It also seems I also can't use a carryback from 2019 for the same reason.

Does this make sense?   Thanks for your help.!

[pk]

@patamelia  thank you for clarifying your situation.  As long as you are happy with the filing, I am good-- even though I disagree with the way you are handling the rental income, perhaps  the end result is the same .  When I was in Germany in the eighties, yes  I ( my employer ) used Coopers & Lybrand  to do my taxes  and generally these were OK -- my rental income was in the USA and doubly taxed  ( US and Deutschland ).  Since then I have worked as a  Tax Professional for many years  ( and obviously have strong opinions on how things should be done ).  However, as I said , as long as you are satisfied with the tax filing that is all that matters  (for the time being ).  Stay safe