High Tax Kick Out and rental income

Hi,

I am a UK higher rate tax payer. I exclude general income under FEIE.

This year for the first time I have rental income, which is taxed in the UK at the Scottish higher rate (41%). I had no US tax due on the rental income this year after deductions and depreciation, but I put FTC in the passive category to save up as much as I can to credit against capital gains (also passive category) in the event of selling the rental property (was primary residence for 6 years, then rented out).

I just heard about the High Tax Kick Out rule. Does this mean my rental income FTC is moved to the general basket? (which would be a problem as I would then have no tax credits against the passive rental income). Any pointers on whether and how the high tax kick out applies to my situation would be very helpful.

Thanks

I think you will find all of the instructions on page 15 of i1116

https://www.irs.gov/pub/irs-prior/i1116--2016.pdf#page=15

Sounds like a complex area and much will depend on your UK tax situation on your rental income - good luck!

The rental activity is reported on Schedule E, Form 8858 plus a Foreign Branch Form 1116.  It is not passive basket income at all, consequently the high tax kickout rules are not of relevance here.

The rental activity is reported on Schedule E, Form 8858 plus a Foreign Branch Form 1116.  It is not passive basket income at all, consequently the high tax kickout rules are not of relevance here.

Can you say more about this? I completed all the questions in TurboTax and it was not a "qualified business unit" as I don't spend 25% of my time on it and its not a well defined business with separate books etc.. So TurboTax put it in the passive category.

Sounds like a complex area and much will depend on your UK tax situation on your rental income - good luck!

My UK tax situation is I think relatively straightword. The rent is split 50:50 (joint ownership) and I am a higher rate tax payer so taxed 41% on this with a 20% tax credit on mortgage interest. How does this impact the US side? (I was planning to take FTC but only just found out about the HTKO)

This is a discussion among US tax experts. All concur that an 8858 is required.