Can You Use Foreign Tax Credit on Real Estate Income?
한국 부동산 소득에 대한 외국납부세액공제 — 정확한 적용 범위 2026

Overview — The §901 Income Tax Requirement IRC §901 — 소득세 요건

Under IRC §901 and the U.S.–Korea Tax Treaty, the Foreign Tax Credit applies only to foreign taxes that are income taxes (or taxes imposed in lieu of an income tax). Korean real estate generates several different categories of tax — some are income taxes that qualify for FTC, and some are property or transaction taxes that never qualify, regardless of amount.

FTC-Eligible Korean Real Estate Taxes FTC 적용 가능한 한국 세금

NOT FTC-Eligible — But Some Are Still Deductible FTC 불가 — 하지만 일부는 비용 공제 가능

Rental vs. Capital Gains — Separate Passive Basket Calculations 임대소득 vs. 양도소득 — 별도의 passive 바스켓 계산

Both Korean rental income tax and Korean capital gains tax fall within the passive FTC basket — but they still require separate limitation calculations because they arise from different income events in different tax years (or even within the same year, from functionally distinct income items).

• Korean rental tax cannot offset U.S. tax on a capital gain from selling the same property, and vice versa — within the same passive basket, the limitation is calculated based on each specific income item's proportion of total income, not pooled freely across unrelated income events.
• Real estate business income (if conducted as an active Schedule C business rather than passive rental) falls in the general basket instead — a different basket from rental/capital gains, requiring its own separate limitation calculation.
• Korean real estate fund (REIT/부동산펀드) distributions are also passive basket, but may separately trigger PFIC analysis (Form 8621) with its own distinct credit mechanics under the §1291 regime.

Depreciation Recapture — The Limitation Formula, Not an Exclusion 감가상각 재계산 — 배제가 아닌 한도 계산식 적용

The practical consequence: a taxpayer with a large enough Korean 양도세 payment relative to the total U.S. tax (LTCG + recapture combined) can still see that Korean tax fully absorb the U.S. liability, including the recapture-attributable portion. What is true — and likely the source of the original caution — is that the recapture mechanism itself (the requirement to recognize depreciation-attributable gain at the higher 25% rate) is a U.S.-side calculation Korea has no equivalent for, and no Korean tax specifically targets or labels a "recapture" amount for direct one-to-one matching. But this is a difference in calculation structure, not a rule that walls off FTC from ever reducing the recapture-attributable tax.

Currency Conversion for the FTC Claim FTC 청구를 위한 환율 변환

• Use the same conversion method as the related income: if rental income was converted using the IRS yearly average rate, convert the associated Korean rental tax using the same rate for consistency in the Form 1116 calculation.
• For capital gains, the sale-date rate is the most common and most precise method for converting the Korean 양도세 — matching the rate used for the sale proceeds in the gain calculation itself.
• The IRS yearly average rate is also an accepted alternative for rental income items, applied consistently — this is more flexible than a single rigid rule, though consistency between the income and its associated tax conversion remains required.

FTC Cannot Create a Refund FTC는 환급을 발생시키지 않음

Korean 1-House Exemption — No FTC Without Korean Tax 한국 1주택 비과세 — 한국세 없으면 FTC도 없음

When Korea's 1세대1주택 (one household, one home) exemption applies, Korea imposes no capital gains tax on the sale. Since FTC requires actual foreign tax paid, there is simply no Korean tax to credit — the full U.S. capital gain (subject to the separate and narrower IRC §121 exclusion, if applicable) is taxed without any offset.

5 Fully Computed Examples 실제 계산 사례 5개

Common Mistakes 자주 발생하는 오류

• 1 Crediting 재산세, 종부세, 취득세, 등록세, 중개수수료, or VAT as Foreign Tax Credit. None of these are income taxes; only 종합소득세/분리과세 (rental) and 양도소득세 (capital gains), plus their associated 지방소득세, qualify.
• 2 Assuming FTC categorically cannot reduce the depreciation recapture portion of U.S. tax. The FTC limitation formula applies to the combined U.S. tax on the foreign-source gain (LTCG plus unrecaptured §1250 gain) as a single calculation — a sufficiently large Korean tax payment can offset tax attributable to the recapture portion as part of that combined limitation, not as a separately excluded item.
• 3 Mixing the rental income FTC calculation with the capital gains FTC calculation for the same property. Even though both are passive basket, they arise from different income events and require separate limitation calculations — excess credit from one cannot be freely applied to the other within the same basket without following the proper carryover mechanics.
• 4 Not claiming the Schedule E deduction for 재산세 simply because it isn't FTC-eligible. Property tax is not creditable, but it remains a legitimate rental operating expense deduction — a different, but real, U.S. tax benefit.
• 5 Using a single exchange rate for the income and a different, inconsistent rate for the associated Korean tax. This mismatch distorts the FTC limitation calculation even when each figure is individually computed under some valid method.
• 6 Expecting a cash refund when Korean tax exceeds the U.S. tax on the same income. The FTC reduces U.S. tax to $0 at most; the excess becomes a carryover, not a refund.
• 7 Assuming Korea's 1세대1주택 exemption generates an automatic U.S. exemption or FTC. No Korean tax paid means no FTC is available — the U.S. gain remains fully taxable subject only to the separate, narrower §121 exclusion if its specific requirements are independently met.
• 8 Treating 종부세 the same as 재산세 for Schedule E deductibility. 재산세's direct connection to the specific rental property supports its deduction; 종부세's wealth-based, aggregate-holdings character makes its deductibility a closer question that should be evaluated conservatively.

Hanmi CPA Insight