Rent from a house in India: Schedule E, depreciation and the 30% deduction that does not exist

An Indian flat or house let to a tenant is taxable in the US as foreign rental income, whether the rent is paid to you, to a parent, or to an account you do not use.

Computing it the US way

India taxes house property on "net annual value" less a flat 30% standard deduction and home loan interest. The US computes actual cash rent minus actual expenses. So the Indian computation cannot be copied across.

Report on Schedule E, Part I, with the property's address and country. Deduct:

• municipal taxes, repairs, insurance, management and agent fees
• mortgage interest (a loan from an Indian bank is acceptable)
• travel to inspect the property, in some cases
• depreciation, below

The 30% standard deduction is not allowed. Convert each month's rent at that month's rate, or use the yearly average.

Depreciation is mandatory

A foreign residential rental building is depreciated over 30 years (alternative depreciation system), straight-line, using only the building's cost and not the land. The cost is converted into dollars at the rate on the purchase date. The deduction reduces your taxable rent each year.

If you do not claim it, the IRS still reduces your basis by the depreciation "allowed or allowable". So omitting it costs you the deduction now and does not avoid the tax later. If you have rented the property for years without claiming depreciation, there is a procedure to claim it by changing the accounting method, using Form 3115. Ask before filing amended returns.

TDS on rent

A tenant paying rent to an NRI must deduct tax at 30% plus surcharge and cess (about 31.2% before surcharge) and deposit it with the Indian tax department. The tenant needs a TAN and issues you Form 16A. The tax paid is credited against your Indian liability, and since the actual tax on the net rent is usually lower, you file an Indian return to recover the excess. See India filing.

Foreign tax credit

Indian tax on the rent is creditable against the US tax on the same income through Form 1116, in the passive category. But the credit is limited to the actual Indian tax, not the TDS deducted. If you have claimed a refund, the credit is reduced to match.

Net investment income tax

Rental income is generally net investment income. Above $200,000 of modified AGI for a single filer ($250,000 jointly), an additional 3.8% tax applies, and the foreign tax credit cannot be used against it.

Mismatches to plan for

• Interest on a home loan is deductible against rent in both countries. India limits the set-off of house property loss against other income (Rs 2 lakh a year, and not at all under the default new tax regime), a limit that does not exist in the US, so the two returns can show different results. The US passive loss rules may defer that loss.
• Rent collected by a relative is yours if you own the property. Work out whose property it is.
• A property you live in during visits and rent out otherwise is split by days.

Records to keep

Purchase deed and cost, stamp duty and registration, improvement receipts, loan statements, monthly rent receipts, Form 16A, and the exchange rates used.