Foreign rental property sale - taking foreign tax credit

[mani92]

Hello,

I sold my rental property in India last year. The income is reported under rental properties and royalties. How do I report the taxes and income in 1116? After reporting all foreign tax paid, turbotax is not recognizing the property income as foreign income. So, tax credit is coming to zero. Could you help reporting this income correctly to get the tax credit. 

I also have foreign interest and dividend income. Should they be reported under interest and dividend section or directly on form 1116?

I would appreciate you help.

Thanks

Mani

[DavidD66]

To enter your foreign rental property sale in Form 1116 in TurboTax:

1. Make sure that the sale and your gain is reported on Form 8949 and Schedule D.
2. Navigate to the Foreign Tax Credit/Deduction section
3. Answer the interview questions
4. Indicate you want to take the credit, not the deduction
5. Select Passive income for income type
6. Select India as the country
7. Enter a description like "India Rental Sale" and your gain on the sale (same amount reported on 8949/Schedule D.
8. Note - adding your income/gain in this section does not add it to your taxable income.  It is only used to calculate the credit.
9. Continue and enter information where applicable
10. Enter your foreign tax paid
11. Continue with the rest of the interview.  
12. You will see your Foreign Tax Credit amount on the final page after continuing through the entire section

Do Not 

[mani92]

Thank you David. One more follow-up question

Last year, when i was looking for a buyer, I did not rent it. Should it still be shown as a rental property?

[DaveF1006]

Yes, it would be shown as a rental property but how you will report it differs from the instructions given above. Here should be the correct method of reporting this to comply with IRS regulations.

1. Go to Federal > Wages & Income > Rental Properties and Royalties (Sch E). 
2. Add a new property. Use the address in India.
3. Key Dates: Enter the date you first started renting it (the "Placed in Service" date). 
4. Final Year Info: Mark that the property was sold in 2025.
5. Income/Expenses: Enter $0 for rent received (since it was vacant while for sale), but enter any final utilities or property taxes you paid.  Don't confuse property taxes with the foreign taxes that you will claim on the sale of the house mentioned later.

Step 2: Set up the Asset & Calculate "Allowable" Depreciation

This part matters most. Enter the value of the house when it became a rental.

1. Go to Assets/Depreciation within that rental. 
2. Add an Asset: Category = "Rental Real Estate Property."
3. Cost Basis: Enter what you originally paid for the house (in USD) + any major improvements.
4. Land Value: You must estimate the value of the land at the time of purchase. Land does not depreciate. (Example: $200k total = $160k building / $40k land).
5. Depreciation Method: For foreign residential property, the IRS requires a 30-year straight-line method (ADS).

Prior Depreciation: Since you never reported it, this will be $0 in your records, but TurboTax will calculate the "Allowable" amount based on your "Placed in Service" date. This "Allowable" amount must be subtracted from your basis, increasing your taxable gain.

Step 3: Report the Sale within the Asset

1. While still in the Asset screen, check the box "This item was sold..." 
2. Enter the Sales Price and Sales Expenses (commissions, etc.) in USD.
3. TurboTax will now generate Form 4797. This form will "recapture" all that depreciation you never actually took and tax it at 25%.

Step 4: Link the Foreign Tax Credit (Form 1116)

1. Now that the gain is on your return, you need to apply the taxes you paid to India.
2. Go to Deductions & Credits > Foreign Tax Credit.
3. Select Passive Income (Gain from a rental sale is passive).
4. Select India.
5. When asked for "Foreign Assets" or "Gross Income," Enter the gross proceeds on the sale.
6. Enter the amount of Foreign Tax levied on the sale of the house when it asks for this information. 

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