Form 1116 line 3e from Rental income

[lbeauvil]

I am using Windows desktop Turbotax Premier 2022.

TT includes gross rental income (no deduction) from Schedule E line 3 for the computation of Gross income form 1116 line 3e but is using net rental income for the computation of taxable income Form 1116 line 18.

Since we use the net rental income (after expenses and depreciation) for input  to form 1116 line 1a, this caused a mismatch in the computation of the foreign tax credit and we can't account for 100% of the taxes.

I believe that line 3e should use the net rental income after deductions since this is what the tax for the rental is based on.

Example:

		Total income	% of income   based on Real total	% of income   based on TT total
Canadian source	Interest	$            19,586	30%	28%
	Rental minus deduction	$              2,805	4%	4%
	Salary	$            31,123	48%	44%
US source	401k	$            11,950	18%	17%
			100%	92%
Total	Real total	$            65,464
Total	From Turbotax (not accurate)	$            71,173

When calculating the amount of taxes to use for credit on the 401k, the number is wrong because there is only 92% accounted for.

The only way I figured to get the computation correctly and account for 100% of the taxes is to do a Gross Income adjustment in form 1116 Smart Worksheet.

Am I doing something wrong?  Could you point me to how I can get 100% of taxes accounted to each income category.

Thanks

[Anonymous_]

@pk?

[lbeauvil]

Did any body had a chance to look at that?  Should I deduct the rental expenses ($5710) from the total income on form 1116?  

[lbeauvil]

I asked ChatGPT what rental income should be included on Form 1116 line 2e.  ChatGPT is not always right but here is the answer I got.  That would suggest that Turbotax is using the wrong number.  Please, have that looked at.

From ChatGPT:

On Form 1116, Line 2e is used to report passive category income, which includes rental income. The amount you report on Line 2e should generally be the net rental income after deducting allowable expenses from the gross rental income.

Calculation for Reporting on Form 1116, Line 2e:

1. Gross Rental Income: This includes the total income received from the rental property before any expenses are deducted.

2. Allowable Expenses: Deduct from the gross rental income the allowable expenses related to the rental property. These may include property management fees, repairs, maintenance, property taxes, mortgage interest, and depreciation.

3. Net Rental Income: The result of subtracting the allowable expenses from the gross rental income gives you the net rental income.

4. Reporting on Form 1116, Line 2e: The net rental income figure, after deducting allowable expenses, is what you would report on Line 2e of Form 1116 in the passive category income section.

[DawnC]

For lines 3d and 3e, gross income means the total of your gross receipts (reduced by cost of goods sold), total capital and ordinary gains (before subtracting any losses), and all other income (before subtracting any deductions).

Here is what the IRS instructions for Line 2 of Form 1116 state:  Enter your deductions that definitely relate to the gross income from foreign sources shown on line 1a. For example, if you are reporting foreign business income on line 1a, include on line 2 business expenses such as supplies and advertising incurred as part of operating the foreign business. Also include on line 2 state and local income taxes related to foreign source income. For more information, see Pub. 514 and section 861 and the regulations under that section. Attach a statement listing the separate expenses included on line 2.  

There is no 2e on Form 1116, but guidance for lines 3d (foreign sources) and 3e (all sources) is above.  Both lines should be the gross income amount.

[pk · Accepted solution]

@lbeauvil , while generally agreeing with @DawnC  for her excellent reply, one point one needs to remember is that  Foreign Net Rental income  ( IRS sometime calls it Gross Rental income ) is  Total Rental income LESS deductions allowed under the laws of that country ( which may or may not be the same  as US version ).  The logic behind this is that your net foreign rental income is based on local laws --that is what you received as foreign income.   Any  income taxes paid  on that net income ( may be different  from the US rental income  Schedule-E ) to a foreign taxing authority is eligible for  Foreign Tax Credit by using form 1116  ( while all the foreign taxes  paid is recognized as foreign tax credit, ONLY a portion  is  allowable  for the current tax year  and rest available  for carry back or carry forward ).

Does this make sense ?

Is there more I can do for you ?

[lbeauvil]

Hi pk, this makes a lot of sense. 

I ended up doing a "Gross Income Adjustment" on form 1116 to remove the Canadian rental expenses and depreciation from line 3e since in Canada these expenses are remove from the rental income before calculating taxes.

Thanks

[pk]

@lbeauvil , If this has solved your issue please consider accepting the answer  and  ( if you are really happy  ) giving a thumbs up -- we  volunteers survive on the number "thumbs-up and accepted answer ".  Else  tell me what more I can do for you to earn  that thumbs up --please .