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Level 2

Rental Income abroad - Foreign tax credit, cash or accrual method of accounting when foreign taxes are due after the US tax?

Hi everyone,

hoping to get some feedback from experience from people having rental income abroad and using foreign tax credit.

I currently live in the US and have a rental property in France. In France, taxes on income are due during the summer, in the US they're due in April.

My CPA used cash method of accounting on my return for last year, meaning that I didn't have to file for an extension to wait for the income tax return from France to apply the exclusion in the US, and I instead applied the tax credit on french income taxes paid during the year. I will keep this method of accounting as I think it makes sense and doesn't require to file an extension every single year to wait for the french tax return amount.

A friend of mine that is in the same situation told me that he spoke with multiple CPAs and tax experts and they said that's it's very common practice for people that have rental property in France to file an extension every year to wait for french tax return, so I believe they're using accrual method of accounting.

To me, this doesn't make sense as it makes it much more complex to have to file an extension every year, why not use cash method? Am I missing something?

I plan on doing my own tax return next year on the basis of what my CPA did last year, so I'd love to get some feedback and potential explanations for this logic.

Thanks a lot in advance!

1 Reply
Level 15

Rental Income abroad - Foreign tax credit, cash or accrual method of accounting when foreign taxes are due after the US tax?

I've got three rentals myself, but none abroad. All I have is the experience of others in this forum over the last 15 years, combined with my own 30 plus years as a landlord.

I myself don't understand why anyone would use the accrual method when it comes to residential rental real estate. The additional paperwork it can potentially create when things happen (such as a tenant skipping out on you) can be avoided by just using the cash method.

With the U.S. tax return, there's two possible places to enter foreign taxes on rental property, and you should only enter them in one of those places. Also helps if whatever place you enter it is consistent year to year. I don't know if it matters or not where you claim the foreign taxes. But if it does, I'm sure someone will jump in here and let us know.

I also don't see any need for an extension. Perhaps I'm not understanding something maybe?

The foreign taxes paid in the tax year being filed can be included with the amount claimed on line 16 of the SCH E, or on line 20 of the 1040. (Amount on line 20 comes from the SCH 3 line 7. Line 1 of the SCH 3 is your foreign tax credit.)


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