Question

I bought a condo outside US and rented out. Besides filing income on tax return in that country, which form do i need to claim foreign income tax paid on US tax return?

Forum|Forum|7 years ago
June 5, 2019
2 replies
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I bought a condo outside US and rented out. Besides filing income on tax return in that country, which form do i need to claim foreign income tax paid on US tax return? (2) how to take into account currency difference between the two countries for the "income earned minus expenses such as property management fees, HOA, property tax "etc; (3) how to calculate depreciation?; (4) how to claim tax paid in foreign country upon closing?.

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A

Anita01

Employee

You would have to report the income and expense on the Schedule E for rental property. You do this under the Rental Income and Expense section under income.

When you enter the cost basis and other expenses, you translate them into US dollars by exact date or average. For example, you would use the exact date for the purchase price, For equal expenses paid monthly, you could average month-end translation rates and apply that rate to the amount paid over the year.

For depreciation purposes, you will enter the rental property as an Asset, and make sure you choose that this is a foreign property, as foreign properties depreciate at a different rate than domestic properties. The program will then calculate the allowable depreciation for you.

You can only deduct foreign tax paid up to the amount of tax you WOULD have paid in the US on the same income. That amount may turn out to be lower than the amount actually paid in the foreign country.

You enter foreign tax paid under the Taxes Paid Topic under Deductions and Credits. You can enter the full amount of foreign tax paid but, remember, you will only be credited for the amount you would have paid on the income in the US. Your tax paid in the other country when purchasing the real estate may not be a tax normally paid here in the US and would likely not be included in your credit. If, on the other hand, it was property tax paid at settlement, you would include it on the Schedule E for rental income, translated into US dollars on the date paid.

V

vsr94539

HI have a folloup Q,

As the rental property is overseas do we need to list out the expenses under line#2 "deductions in form 1116 "passive income catagory " as well?

I know we need to have expenses in ScheduleE which is linked to 1040.

Thanks a lot.

-VJ

P

pk12_2

Employee

Are you US citizen/ Resident ( Green Card )/ Resident for tax ourposes ? If so then yes the comments above by @Anita01 applies but not if you need to file form 1040-NR. Also please note that foreign tax credit is generally applicable only to tax on income . Some countries ( Greece for example ) have a flat tax on rental property which does not have a direct equivalent in the USA and therefore needs to be treated as a component of property tax or similar ( and therefore not treated as eligible for foreign tax credit ). Also which country are you talking about --- there may be treaty conditions to be considered ? Another point to note is that while foreign tax credit computation recognizes nearly all the taxes paid, but allowable amount is based on a ratio of foreign income to world income -- unallowed foreign tax credit can be carried back or forward but can be used ONLY when there is foreign income.

Carl11_2

Employee

Basically, the absolute only difference between foreign rental and domestic rental property when it comes to the SCH E, is the fact that foreign rental property is depreciated over 30 years if placed in service ***AFTER*** 2017. Otherwise it's 39 years if place in service in 2017 or before. Whereas domestic rental property (rental property located in the U.S.) is depreciated over 27.5 years.

Understand that it is "RARE" for rental property to ever show a taxable profit "on paper" when you file your taxes. This is especially true if you have a mortgage on the property. Generally, the allowed rental deductions of mortgage interest, property taxes, insurance and the depreciation you are required to take by law will themselves exceed the total rental income received for the year. Add to that the other rental expenses you are allowed to take and you're practically guaranteed to not have taxable rental income on the SCH E. So if line 26 of the SCH E shows zero or a negative amount, then you have *nothing" to exclude from U.S. taxation in the foreign exclusion section of the program since you have no taxable rental income.

If line 26 shows a positive amount, then you can only exclude the portion that you "actually paid" foreign taxes on. But I doubt you'll have a positive amount on line 26.