form 1116,including depreciation as part of expense or not

[shsamardar]

I live in california and I have a rental property in Canada. My CCRA residency is non-residense. I am filing section 216 and I am paying $900 USA tax to CANADA. My gross rental is higher than rental expenses.

in my USA 1040, In schedule D, I am reporting this rental property. Because in USA, for real state we have to depreciate, Gross minus expenses minus depreciation is less than 0 and I am reporting passive loss.
Due to difference in reporting depreciation in USA and not reporting in CANADA, I am paying tax to canada and not to USA.
Now, In form 1116 , foreign tax credit, in section deduction and losses, specially line 2 titled 'expenses definitely related to foreign income', I am wondering whether I have to include depreciation or not.
The problem is if I include depreciation as part of expense in this line, my foreign tax credit will be 0 although I paid $900 tax to canada.
Is expenses different that depreciation from IRS? at least in schedule D, depreciation is not part of expenses section and there is a specific lie for depreciation outside of section we declare expense? is definition of expense as money out of pocket and depreciation as adjusting the value of property suffiicent logic to difference between depreciation and expense and not include depreciation in foreign tax credit? can I get foreign tax credit based on above scenario or I have to report my foreign taxas itemized that doesn't look attractive for my case. credit is better if I can take it.

[nelsona]

Since you are not reporting any net income (unless you have other Cdn source income), your foreign tax credit is going to be zero.

You can however use any Cdn tax that you actually paid in 2006, which was not or will not be refunded, as a tax deduction.

I would think that the deduction would be better.

Of course, there is nothing stopping you from depreciating in canada to reduce your CDn taxes.

[shsamardar]

Thank you Nelsona

When you say deduction, are you referiing to itemized deduction? itemizing in line 7 of schedule A, 'other taxes' ?

if yes, through witholdings to canada, I paid $1000 to Canada in Calendar year 2006. With section 216 filing, I am calculating that my final tax will be $1200. therefore $200 more and I am paying this $200 in 2007.

For 2006 schedule A, which scenario do I have to take:

1- reporting $1000 I paid in 2006 in 2006 return and $200 in 2007 tax filing next year
2- reporting whole $1200 in 2006 filing.


Thanks

[nelsona]

Yes, I am refering to Schedule A.

re-read what I said was eligible for the deduction:

"tax that you actually paid in 2006, which was not or will not be refunded"

[nelsona]

Since you must depreciate in US, don't you feel it would be wise to also depreciate in canada?

You are paying tax for nothing.

[shsamardar]

Yes, Now I understand this statement:
"tax that you actually paid in 2006, which was not or will not be refunded"

vey nicely phrased.

If I depreciate in Canada, what will be advantage or disadantage when I will sell it?

Thanks Nelsona

[nelsona]

The advantage is that you defer taxation on your rental income (you would depreciate only what you need to zero your net rental income). This would align you with your US tax.

The disadvantage is that your cost basis when you sell will be lower. thus creating a larger cap gain. But since cap gains are taxed less than regular income, and that it has been deferred, and that you will be reporting a lower cost basis in US anyways, there is no disadvantage.


Many people shy away from CCA on a home in case they would move back to it, using CCA disqualifies one from certain tax deferrals. But such tax deferrals are not available to a non-resident, or not beneficial to a non-resident returning to Canada.

[shsamardar]

Very makes sense Nelsona

you said:
"you would depreciate only what you need to zero your net rental income"

Does it apply to USA as well? for example, If gross - expenses -depreciation = -400 ( please notice minus )

Can I decrease my depreciation value ( calculated based on class, ....) by 400 to make the formual exactly $0 and save 400 for future years for depreciation?

Thanks Nelsona

[nelsona]

Since depreciation is mandatory, you must take it in US, no?

You are no doubt considered an active participant in the renatl, so losses would be deductible. Your software will figure any limit.


For details look at IRS website.

[shsamardar]

I have property manager in Canada and they are deciding on behalf of me about choosing tenants, getting rents, etc.

Based on above, I don't think I am active. I am claiming as passive. Am I doing right?

for depreciating my rental in Canada that is Condo, I have to depreciate only building and not land. I bought it in 2001 and started renting in 2005 and in 2006 , I am starting depreciaitng that ( based on your advice ).

By reading documents in CCRA, it seems I have to put base of cost for fair market value the time I am starting renting that was 2004. how can i know what was FMV of my propoerty two years ago? is my propoerty tax notice of that year sufficient ?

Thanks Nelsona

[nelsona]

It is very important, for several reasons, to have an accurate FMV of your property when you left Canada. It will be used by both CRA and IRS in determining what your cap gains on the house will be when you finally sell.

There are firms that can do this for you -- contact a real estate broker in the area you lived.

If you determine that your participation is passive, then you will need to fill a form to see if your loss is limited. Whatever loss you cannot claim can be carried forward until you do make a profit by US calculations.

I trust that you have been reading all you can on the passive loss limit on the IRS website.

[shsamardar]

Thank you very much Nelsona for your great help