Depreciation Recapture of Canadian Rental that did not have

[depreciationrecapture]

I am a US resident since 2011 and I sold a Canadian rental property in 2016 that I owned for 10 years. It was my principal residence till 2008. I made the mistake of not using depreciation in Canada and I am looking at depreciation recapture in US with no equivalent on Canadian side. I have seen in these forums that this is not the recommended path. Hoping that there is something I can do to salvage the situation!

I have paid rental income tax of approximately 2000 every year in Canada (Section 216) and nothing or negative in US for 2011-2015. The Canadian rental income tax is not reflected anywhere on the US side currently. Can I amend returns from 2011 to 2015 and add the net rental income (line 1a) on form 1116 with corresponding tax paid (line 8)? Of course these would not generate Foreign tax credits (FTCs) for the past returns since there would be zero or negative rental income on the US side to get credit for but I'll be able to accumulate the FTCs. Then for 2016, I can put depreciation recapture as income on form 1116 (line 1a). There wouldn't be any tax paid in Canada for it but I can use all the carry forwards of rental income tax on line 10 (Carry-back or carryover). Any opinions on this strategy? One concern is that there is a sizable loss on the US side in couple of years and I am not sure how that affects the determination.

Thanks in advance!

[nelsona]

You can try. Generally you are only allowed to amend the past 3 years' returns.

Any particular reason you decided not to CCA in Canada?

When you say the "Canadian rental income tax is not reflected anywhere on the US side currently", does that mean you failed to report the rental income altogether?

[depreciationrecapture]

I would say mostly the reason for not using CCA is ignorance and not looking into it in detail. Nonetheless the factors were a) we did not know how long we would stay in the US as I was just renewing contracts annually on my TN, b) the decision to sell property was only made last year and c) the accountant who prepared my returns in 2011, 2012 had influenced me to not use CCA to keep principle residence status for the property in Canada. From what I know now, all of the above reasons are not valid as not only they don't optimize my situation for CRA, on the IRS side, they make things worse.

The rental income is shown every year on schedule E in US but it is negative or zero. What I meant is that I've paid to the tune of 7-9 K in Canadian tax for rental income that IRS does not know about.

I had a couple of follow up questions:
1) If I cannot use rental income tax paid to Canada in 2011-2012 as it goes back more than 3 years, can I use it as deduction? Do I need to submit my Canadian returns from then to IRS to support my position?
2) For 2011, I had employment income in Canada for a few months. Form 1116 was submitted and I have some FTC leftover for that (around 3400) that I could never use in future years. The trouble is that it is in general income category and I think I can still not use it for 2016 because depreciation recapture will be a separate category i.e. passive income category. It looks like a dead end but just wondering if there is something I can to use it as credit. I assume that I can use it as a deduction still.

[nelsona]

As you now realize, you cannot claim primary residence in Canada when non-resident.

1. No. You can't amend those returns, and you can't use it other years. That is why I said you have 3 years.

2. Your rental and depreciation are passive. You can't use the carryforward on wages until you have general income -- and you can't deduct it either. I wouldn't fret too much about the lost years, as you noticed with the foreign wages using up Cdn tax fully is almost impossible. With the rental tax from the past 3 years and the cap gains on the sale, you may have all the "usable" Cdn tax you need.

As I see it, the only way you can amend a 1116 is if (a) you had deducted the foreign tax, and now want to change toa crdit, or (b) CRA redetermined your Cdn tax in any of those years, which would CHANGE your tax refund/payment. neither applies in your case.

And you can change from deduction to credit beyond the 3 years range (10 years), but you cannot change from credit to deduction past the 3 year mark.

[depreciationrecapture]

Thank you for the detailed responses, they are really helpful!

So I actually did not submit any form 1116 in the last 3 years. Can I add them in my amended returns?

Or can I just not amend and plug the Foreign tax paid in 2013/2014/2015 in 2016's Form 1116?

Thanks,
Shamile

[nelsona]

You HAVE to amend the returns them if you want to include them each year.