When filling out Form 1116 for foreign rental income, how do i enter the income?

Forum|Forum|2 years ago
March 24, 2024
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I want to claim a foreign tax credit for taxes I paid on foreign rental income. How do I enter this on form 1116 in Turbotax?

Lets assume $10,000 foreign rental income. I had $6,000 allowable expenses, so according to schedule E I have $4,000 foreign income.
How do I enter this on form 1116? Do I enter 4,000 as foreign income in this category?
The letter of TurboTax seems to suggest that I enter $10,000 income, and then at the deductions it tells me that I shouldn't enter any deductions (the $6,000 expenses) because i take a standard deduction. That seems incorrect?

Online sources seem to contradict whether to enter $10,000 as income and then report the $6,000 as definitely related expenses, or to enter $4,000 as income (after all, this is then added up as 'total income' on form 1040).

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jtax

Employee

For business (including rental) you should deduct those schedule E expenses on the 1116 as expenses directly related. Enter $10k foreign income and $6k in 1116 deductions directly related to the $10k income.

What's happening is that that section of the 1116 is figuring out your net foreign income. You get to subtract the expenses directly related to the income (schedule E in your case but could be schedule E or perhaps investment fees or something else in other cases) and a proportional share of the standard deduction. The standard deduction is not directly related to any income so the 1116 is allocating it some to the rental income and some to the rest of your income.

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jtax

Employee

Also see e.g. page 17 of the 1116 instructions for part I, line 2:

https://www.irs.gov/pub/irs-pdf/i1116.pdf

Line 2
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

Unless you find more specific instructions for rental real estate, I think it is the same as a business for 1116 purposes.

The instructions of form are clear that Line 1 is the gross income. So you need to enter line 2 expenses to get to your net foreign income. (And then later TT will also take of a share of the standard deduction.)

Remember the 1116 is not giving you back the foreign taxes. Rather it is giving you back (at best) the US tax on the income the foreign country is taxing. Since US tax rates are so low, you almost always wind up paying more to the foreign country. But at least you don't pay twice. (Usually, but this is a very complex area.)

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Stsxoz

Should depreciation calculated in Schedule E be included in the rental expenses reported on Form 1116, Line 2? These depreciation costs were certainly not part of the actual expenses or part of the rental expenses reported in overseas tax return.