How Do You Offset Rental Property Income from Germany for U.S. Resident

[Greg from Long Island]

I have a client who is a U.S. resident and German citizen who operates a rental property in Germany. This is reported on Schedule E. It's my understanding that Article 6 of the Germany-U.S. tax treaty enables Germany to tax rental income from real property located in Germany. So where do I offset the profit on the tax return to avoid double taxation? I read somewhere this would be reported as negative income under the section of the return dedicated to MISC income and fill in/attach Form 8833 to the return. Is this right?

[itonewbie]

No, that is not right.

Article 6 does not give Germany the exclusive right to tax the rental income.  Neither does it impose a limit on the tax that either the US or Germany can levy on the net income.  Double taxation is alleviated through Article 23 of the DTA and §901.

[Greg from Long Island]

Thank you for your quick response. Just to clarify, when you say this isn't right, is that to say the profit from the Germany-based rental property is fully taxable on the U.S. tax return? Or are you referring to the part of the tax treaty which allows the taxpayer, in this case, to avoid paying tax on this rental income - in which case how is reported as an offset on the tax return?

[itonewbie]

NP, Greg.

Your understanding of the treaty article and the reporting on the US return is wrong.  The income is fully taxable on the US return.  There is no "offset".  But your client is entitled to FTC for the alleviation of double taxation.

[Greg from Long Island]

Thank you again for clarifying as well as your support. Last 2 related Qs:

--Is FTC based on amount this person paid in taxes on the rental income profit in Germany?

--It is not necessary to fill out and file Form 8833?

[itonewbie]

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--Is FTC based on amount this person paid in taxes on the rental income profit in Germany?

Paid or accrued

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--It is not necessary to fill out and file Form 8833?

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No

[Greg from Long Island]

Thank you again for taking time out to respond.

[itonewbie]

NP, @Greg from Long Island!