form 1116, foreign tax credit and rental income tax

[shsamardar]

Hi

for my rental propoerty in canada, I am paying tax to canada with filing section 216.
for USA, I am filing schedule E and am reporting gross rental income , expenses and depreciation.

in form 1116, it is asking again for income and itemized deductions. do I have to enter them again? or leave them emtpy and enter only foreign tax I paid?

for 2005, due for paying section 216 tax in canada is April 30th 2006. now that I am actually paying the tax in 2006, can I get credit fot it in 2005 in USA or I need to report it next year?

Thanks

[nelsona]

You need to report certain deductions on 1116 in order to correctly divide which deductions were strictly against your foreign income, and which were more 'general'.

On form 1116, when it come to foreign taxes, you have the choice of claiming taxes actually paid in the calendar year, or climing the taxes that have accrued in that year (ie. what you owe for that year).


On your 216 return, I question why you would be owing money on your 216 return, since, by definition, a 216 return is either filed in compliance wit ha previously filed NR6 (on which you would have a withholding rate deterimined) or it is based on getting BACK overpayment from 2005?

What happened between the time you file NR6 and now to change you renatl income and withholding? Or had you not undertaken the correct steps for rental income tax withholding for non-residents? (if so you should straighten that out now).

[Mark T Serbinski CA CPA]

for 2005, due for paying section 216 tax in canada is April 30th 2006. now that I am actually paying the tax in 2006, can I get credit fot it in 2005 in USA or I need to report it next year?

You can claim the tax from a Sec 216 return for 2005, on your 2005 U.S. return.

[shsamardar]

Hi

I want to get benefit of foreign tax credit for rental income I have from canada . I am filing section 216 for canada tax.

For usa taxes, I am depreciating the propoerty in schedule E.

In form 116, it asks for "Expenses defintely related ot the income" . Do I have to include depreciation in this amount as an expense? Do I have to include home mortgage interest in this line as expense or in another line in this form 4b?

also , in line 3, it is talkng about pro rata share of other deduction. Any advice what this means?

Thanks

[nelsona]

You should use tax software to run 1116. All your deductions will reduce your foreign income to some extent. Your deductions which are directly as a result of your foreign income will reduce it to that extent.

The goal of these lines on 1116 is to prevent you from claiming a foreign tax credit on income that you are otherwise getting a deduction ofr.

As to the mechanics of this, let the software figure it out.

[shsamardar]

Thanks for your reply.


is depreciation of my candaian rental propoerty that I am reporting in Schedule E, is this depreciatetion included in the expenses in foreign tax credit? for example, if my rental income is 1000, expenses are 200 and depreciation is 300, how much will be my expenses to be reported in form foreign tax credit form? I hope it is not included otherwise my foreign tax credit will be less that actual of what I am paying to Canada.

I am reporting [b][u][color=red]non of [/color][/u][/b]expenses of this rental propoerty as part of itemized deductions. They are only in Schedule E. ( I am renting in USA and therefore no mortgage, ... for that in itemized deduction )

Is there any way to make foreign tax credit[b][u] to be exact[/u][/b] the same amount I am paying to CCRA?

Thanks

[nelsona]

Without looking too deeply at this, the INCOME that you are reporting on 1116 should be the NET rental income, which would already include any interest, taxes, etc. You would not include these expenses again on Schedule A.

None of the schedule A items would thus be 'definitely realted' to your Net foreign rental income.

Btw, in almost all cases the foreign tax credit turns out to be less than the Cdn tax you paid. That is the nature of the foreign tax credit.

[shsamardar]

Hi Nelsona

I am not reporting anything of rental expenses in schedule A, even a penny.

It is all included in Schedule E.

Still my question, is depreciation of rental property an expense in form 1118 foreign tax credit ? I hope not.

if gross rental = 1000 , expenses = 200 , depreciation = 300, how much is reported expenses in form 1118?

Thanks

[shsamardar]

sorry I am refering t o form 1116 not 1118.
http://www.irs.gov/pub/irs-pdf/f1116.pdf

[nelsona]

"I am not reporting anything of rental expenses in schedule A, even a penny. "

That is what I said. Thus non of the expenses listed on Schedule A are definitely related to that rental income, so all of your Sched A deductions will be spread over your foreign and non-foreign income.

As to the term "Gross Income" you could indicate the gross rent in both lines 13d and 13e, this will actually help your cause.

You should really let the software do the work: just clearly identify your rent as foreign and it will do the rest.

[shsamardar]

"
As to the term "Gross Income" you could indicate the gross rent in both lines 13d and 13e, this will actually help your cause.
"

I am not finding 13d and 13e in form 1118.

I am working with taxcut software with H&R block and actually it doesn't understand foreign rental income. The way I do is that I leave state blank.

Do you please advice any other software that we can define explicitly non USA rental income?

Thanks

[nelsona]

3d and 3e on form 1116.

[shsamardar]

Hi

Based on IRS instruction for form 1116, we may be able to claim the foreign tax
credit WITHOUT filing Form 1116 if three conditions are met.

1- passive income is only foreign income
2-creditable foreign taxes are less that $300
3-all the income and foreign taxes paid are report on form like 1099-DIV, 1099-INT or schedule K or SIMILAR SUBSTITUTE STATEMENTS


for my rental property in canada, I already had NR6 for withholding tax, by filing section 216 of canada, some of the withholding will be returned for me. the difference is my tax to canada. is income tax receipt form that I willl receive from CCRA in JUNE ( response to my section 216) will comply with 3rd condition in above under 'similar substitute statements' ?

Thanks

[nelsona]

No. You must file 1116. Your NR statement is not a substitute, unfortunately.

This applies to brokerage withholding, not rental income.

[nelsona]

Besides, your NR slip is NOT your foreign tax for the year, or foreign income for that matter, it is merely stating what was withheld. You must file a 216 return, and that will determine your tax.

1116 is required.