Selling Your Rental Property- AMT and Foreign Taxes

By Jason Watson, CPA
Posted Thursday, July 16, 2026

Part 7, the last one, of our miniseries takes us across the border. Selling a rental in Ohio is one thing; selling a flat in London is an entirely different beast. When you sell foreign property, you have two sovereign governments standing in line with their hands out. The foreign country where the property sits usually gets first dibs, and the United States taxes your worldwide income. And Yes, not every foreign government taxes the same way.

The Promise Vs. The Reality

In theory, IRC Section 901, the Foreign Tax Credit, saves the day by offering a dollar-for-dollar credit for creditable foreign income taxes paid. But a large gain can push you into the Alternative Minimum Tax, and when AMT collides with the Foreign Tax Credit, the math stops working.

The Tax Cuts and Jobs Act of 2017 pushed AMT out of reach for most households from 2018 through 2025. That changed in 2026.

The One Big Beautiful Bill Act, or OBBBA, kept the higher exemption amounts but reset the phaseout thresholds for 2026 to $500,000 for single filers and $1,000,000 for joint filers. It also doubled the phaseout rate from 25 percent to 50 percent. The result is that AMT reaches more high-income taxpayers again, and a large capital gain is one of the surest ways to land there.

We call this the “Mastercard Mismatch.”

Picture two overlapping circles: the foreign tax and the U.S. tax. The overlap is the FTC, the zone where the foreign tax offsets the U.S. tax. Ideally, the overlap covers the entire U.S. circle, so the credit wipes out the U.S. tax.

In reality, part of the U.S. circle sticks out past the overlap. That exposed sliver is U.S. tax the credit does not cover in the year of sale, which means that slice of income gets taxed twice.

Yup. And it stinks.

Why Does This Happen?

It happens because the FTC is limitation-based. The IRS only gives you a credit up to the U.S. tax attributable to the foreign-source taxable income within that particular FTC category.

Who wants some Code? The limitation is explicitly outlined in IRC Section 904(a):

(a) Limitation
The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States… bears to his entire taxable income for the same taxable year.

Essentially, the IRS squeezes you from two sides:

• Foreign countries may tax the gain at a higher effective rate than the United States, while the United States may tax portions of the gain at preferential capital gain rates. The higher foreign rate can create more foreign tax than the FTC limitation can absorb. Separately, the capital gain rate differential rules under Section 904(b)(2) may scale down the foreign-source gain included in the limitation fraction. One creates excess foreign tax, and the other can lower the ceiling on the credit you are allowed.
• A large sale can also push your income past the AMT exemption phaseout, and after OBBBA that exemption disappears at 50 cents on the dollar. You do get a separate AMT foreign tax credit, so the FTC is not shut out of the AMT calculation. The catch is that the Section 904 limitation rules are run again using AMT amounts. That separate calculation can still leave residual AMT that the foreign taxes do not fully erase.

A Painful, Yet Illustrative Example

To see how this sliver plays out, consider this simplified illustrative scenario:

• Foreign tax paid on the sale: $50,000
• Regular U.S. tax attributable to the foreign gain before the FTC: $40,000
• Regular FTC allowed under the Section 904 limitation: $40,000
• Regular U.S. tax after the FTC: $0
• Pre-credit tentative minimum tax: $50,000
• AMT foreign tax credit allowed under the separate AMT limitation calculation: $40,000
• Tentative minimum tax after the AMT foreign tax credit: $10,000

Result? You pay $50,000 to the foreign country. The regular FTC wipes out your regular U.S. tax, but the separate AMT calculation still leaves you owing the IRS $10,000.

The unused $10,000 of foreign tax may generally be carried back one year and forward ten years, but only if there is enough FTC limitation capacity in the applicable category. Either way, that does nothing for your cash flow from the sale this year.

It is also possible that you never generate enough future foreign-source income in the correct FTC category to use the carryforward. A tax attribute sitting on a tax return is nice, but it is not the same thing as cash sitting in your bank account.

If your eyes glazed over, you are not alone. This is one of the most complex intersections in the tax code. Consumer-grade software will spit out a number, but it will not flag the planning opportunities, explain the limitation calculations or identify the audit risks.

If you are selling a foreign rental, do not assume the FTC will wipe out your U.S. tax bill. The math is tricky, the calculations are separate, and the overlap is imperfect.