Taxes on rental property abroad

[Mizio]

I have a rental property abroad for which I pay property and national income taxes.

I have entered all the relevant information under Business Income and Expenses/ Rental Properties and Royalties, including the property taxes under 'Expenses' but I am not sure whether to also include the national income taxes paid under 'Expenses' or it should rather go elsewhere.

TurboTax reports a loss (as expenses and depreciation are more than the rent itself) and zero deductions, probably because my overall income is above 150k.

Can you please help? 

Thanks 

[PattiF]

The national income taxes paid should be reported on Form 1116 so that you can claim a foreign tax credit.

You can access the form to enter the foreign tax paid by following these instructions:

1. Open (continue) your return in TurboTax
2. Make sure you've already entered all your foreign income. If you still need to enter it, do that now
3. Select Search and search for foreign tax credit. Select the Jump to link in the search results
4. When you reach the screen Do You Want the Deduction or the Credit? select the option you prefer for your situation
5. If you select Take a Credit:
   • Select Continue on the next screen, then select No to fill out Form 1116
   • When you reach the screen Country Summary, select Add a Country
   • Answer the questions about your foreign income, taxes, and expenses on the following screens
   • When finished, you'll be taken back to the Country Summary screen. If you have income from other countries to enter, select Add a Country. Otherwise, select Done
   • Answer the questions on the following screens until you reach your Foreign Tax Credit Summary. If you’re finished with this section, select Done

[Mizio]

Thanks very much for the explanation.

Can I still claim a tax credit even if I have a negative net income derived from the rent?

[Carl]

TurboTax reports a loss (as expenses and depreciation are more than the rent itself)

That's expected. Rarely does long term residential rental real estate show a profit "on paper" at tax time. Typically, when you add up the deductible expenses of mortgage interest, property taxes, property insurance and depreciation, those four items alone can easily exceed the total rental income received for the tax year. Add to that other deductible expenses such as maintenance and repairs, and you're practically guaranteed to show a loss every single year.

and zero deductions, probably because my overall income is above 150k.

Yes, your income is over the threshold apparently, for your filing status. But it's not lost. The unallowed loss just gets carried over to the next year. It's common for PAL carry over losses to increase with each passing year too. Generally, you can't realize those losses until the tax year you sell the property. In any tax year your income falls below the threshold, you'll be able to deduct a maximum of $25K of those corry over losses against other "ordinary" income.

The property taxes paid are claimed on the SCH E, as there's a spot in the rental expenses section that specifically asks for "real estate taxes". Any other foreign tax paid that is not a real estate tax should be claimed outside of the SCH E under the Deductions & Credits tab.

Under that tab is a section for "Estimates and Other Taxes Paid". There is a sub-section in there for foreign taxes paid.

[ThomasM125]

First of all, the tax you paid had to be based on foreign income to be allowable.

You have to report foreign income on your tax return to receive a foreign tax credit in the current year. Since you had a loss on your rental you may have no foreign income this year, in which case you won't be able to use the foreign tax credit, but you can report it as it can be carried over to future years when you may have foreign income.

[Mizio]

Thank you very much for your reply.

The tax is based indeed on foreign rental and the foreign income is reported in TT.

On the 1116 form (which I also filled out given that I also paid foreign taxes on dividends) the total tax credit shows all foreign taxes paid as credit so I should be good

[user14363133]

Dear Turbotax experts, I am PA resident. Received rental income from abroad and paid taxes in that country.  Should I report this income as taxable to PA state or as rents received from real estate located outside Pennsylvania and so such rents are allocable to the jurisdiction where the property is located. And not taxable in PA? 

thank you

[Carl]

PA taxes your worldwide income, same as the IRS does. So you're required to report your rental income/expenses on SCH E and whatever forms the state requires; same as you would if the property was located in PA.

Since long term residential rental property generally operates at a loss "on paper" at tax filing time, it will probably not affect your tax liability to the IRS or the state. But you're still required to report it.

Note also that foreign taxes paid are claimed also, as the IRS and most states allow a credit for foreign taxes paid. Where you report those foreign taxes, depends on what those taxes are specifically. For example, foreign property taxes are reported on SCH E, while foreign income tax is reported under the Deductions and Credits tab in the section for taxes. (It includes a sub-section for foreign income taxes)

[user14363133]

Thank you @Carl, it is getting clear BUT. 

I understand the abroad rent income is reportable, but the question - is it taxable to PA if property is located outside of PA? 

Based on this information, I assume it is not taxable to PA state: 

Allocation or Apportionment of Rents and Royalties from the Extraction of Minerals or from Copyright... 

www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Income-[product key removed]t...

Allocation or Apportionment of Rents and Royalties from the Extraction of Minerals or from Copyrights and Patents

Rents

• Specific Allocation
  Rents received from real estate and tangible personal property (not employed in the operation of a business) and the costs, expenses and liabilities incurred in producing and collecting such rents are allocable to Pennsylvania only if the property is located in Pennsylvania.
• Formulary Apportionment
  If the property is used both within and outside Pennsylvania, the net income allocable to Pennsylvania is determined by multiplying the net income by a fraction, the numerator being the number of days the property was in Pennsylvania during the rental period and the denominator being the total number of days in the rental period.
• No Apportionment
  Rents received from real estate located outside Pennsylvania and the costs, expenses, and liabilities incurred in producing and collecting such rents are allocable to the jurisdiction where the property is located. As such, no Pennsylvania apportionment is allowed.

[Carl]

Per the PA revenue website at https://revenue-pa.custhelp.com/app/answers/detail/a_id/279/kw/foreign%20income%20exclusion/session/...

It states:

"As a resident of Pennsylvania your income from all sources inside and outside of Pennsylvania is taxable and reportable."