RENTAL INCOME IN ENGLAND

[HOPE2]

Hi to all,

Client green card holder lives in the U.S. and has a rental income in England and he said I paid my tax for 2023 in Jan 2024 for this rental.

Can I take this one for 2023 his tax return which I want to file it or should I take the last one he paid in Jan 2023 as foreign tax?

Any insight or guidance would be greatly appreciated!

[Camp1040]

Tax is deductible in the year paid.

[itonewbie]

UK tax is assessed on a fiscal year basis, which does not align with the calendar-year-basis US tax year.  When credit is to be take would depend on whether the taxpayer elected accrual basis and when actual taxes are paid/deducted.

[HOPE2]

@itonewbie Thanks for your help

so he paid tax on 01/14/2024 I should mention this date on his tax return on Part II and marked Accrued. Am I right?

This is the first time I am filing.

Also, Proseries  on the top form 1116 says : Form not required to be filed 

When I Printpreview I can not see form 1116 on his return but the result is in Sch 3 

[itonewbie]

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@HOPE2 wrote:

@itonewbie Thanks for your help

so he paid tax on 01/14/2024 I should mention this date on his tax return on Part II and marked Accrued. Am I right?

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No.  First, did your client elect or is your client electing accrued basis?  Also, 1/14/2024 was the date the tax was paid, as you stated, not the date on which the tax was accrued.

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Also, Proseries  on the top form 1116 says : Form not required to be filed

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You need to be driving the software, not the other way around.  Read the filing instructions for F.1116 and §904(j) for when the exception applies.

As suggested previously, you should familiarize yourself with the international provisions (beyond these basic questions), not only for your clients' benefit but to be compliant with Circular 230, if you are picking up expats and international returns.  There is much much more than meets the eyes with these returns and the exposure for your clients and yourself are high.

[HOPE2]

@itonewbie I am going to read 1116 instruction precisely.

could please  back to you if I have any question.

[HOPE2]

Hi again, I checked his 2022 tax return ( client is new for me) Dep for rental income life was 30yr.

I searched google, found it is this 30yr in England but Proseries has 27.5/30 yr for rental residential.

Should  I switch to 30 yr while Proseries's default is 27.5 yr?

[mark8]

Hi guys,  for non US property you must always take the Alternative depreciation rather than the standard.  It used to be 40 years but recently moved to 30.  Also with depreciation you might actually not have a profit in the US but a loss so not FTC allowed but might have excess credits.  Depreciation is not allowed as a deduction in the UK so often there is a profit in the UK but not in the US.  If you wish to use the accrued method to claim foreign taxes this election is irrevocable so must use it for all future years.  The UK tax year ended on 5 April so you must use the tax due for the year ended 5 April 2023.  Another problem is that most properties in and around London are apartments so the landlord does not normally own the freehold but has a long lease so cannot depreciate the building but must amortize the lease over 99 years as most leases are more than 99 years.

Best

[itonewbie]

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@mark8 wrote:

Also with depreciation you might actually not have a profit in the US but a loss so not FTC allowed but might have excess credits. 

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@mark8 It gets more complicated than that.  Your example would result in an SLL and may even create an OFL, depending on the types and amounts of foreign income the taxpayer has.  SLL allocation will affect limitation for other baskets and both types of losses are subject to recapture.

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The UK tax year ended on 5 April so you must use the tax due for the year ended 5 April 2023.

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It would be helpful to clarify that this is not absolute.  Cash basis taxpayer may claim the credit based on taxes paid/withheld prior to the end of the fiscal year to the extent it is reasonably expected not to be refundable.  All events test is only relevant to the accrual of foreign tax.

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Another problem is that most properties in and around London are apartments so the landlord does not normally own the freehold but has a long lease so cannot depreciate the building but must amortize the lease over 99 years as most leases are more than 99 years.

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It is true most apartments in the UK are on leasehold.

It is interesting that you suggest that landlords with UK leasehold properties are not allowed depreciation and that the cost must be amortized instead.  Could you share your citation for this position?

Not only could this impact current year deductions, it could also have a trailing impact when the leasehold property is sold, by producing favorable results for capital gains without the need for recapture even though "amortization" would offset taxable income at marginal rates.  On the flip side, however, if the IRS disagrees with this position, it could be to the detriment of your clients because the Service will ascertain that cost basis should be adjusted for the greater of depreciation allowed or allowable.

Didn't think there's any controversy as the matter is well settled both in courts and with the IRS.  In fact, leases of land and §1250 properties are classified as intangible real properties subject to §167 depreciation when used in the taxpayer's business trade or business.  §1.1250-1(3) even has an example of that.

Would be happy to consider your position and understand the level of authority you rely on which, in turn, determines whether disclosure should be required on the return.