Paying Tax on Foreign Real Estate

Dear Tax Talk,

We own a rental unit in Canada. All expenses are paid for by the rental agency, and if anything is left, it is deposited in our bank account in Canada.

We file an annual tax return in Canada for noncitizens (Section 216 of the Canada Revenue Agency). And of course, if we make any money, we have to report that on our U.S. taxes.

The real estate taxes that we pay in Canada, we take as a deduction with our Canadian taxes. My question is, can we also take a deduction for foreign taxes paid (the real estate taxes) with our U.S. tax return, or is that considered to be "double dipping"? -- Mary

Dear Mary,

Not only is double dipping a socially unacceptable party dip habit, it's also a no-no when it comes to taxes. Double dipping would mean taking advantage of the same item twice. For example, claiming the real estate taxes as a business deduction and a personal deduction.

When completing your U.S. income tax return, you should complete Page 1 of Schedule E for the Canadian rental. You should report the gross rents and expenses received and paid by the rental agency in Canada, including any commissions they receive. You should also include any expenses that you pay directly, such as travel and real estate taxes. You should also include an allowance for depreciation on the property.

The reporting of the activity in two jurisdictions is not considered double dipping, since each jurisdiction has a right to tax the activity's net profits. Because it is a foreign activity, you would claim any Canadian income taxes as a credit or deduction on your U.S. tax return. The credit or deduction alleviates double-taxation, a fiscally unacceptable policy.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.