HowardS wrote: can there really be separate books and records?
I think you could have an argument meeting the MLTN standard that - in the case of a foreign rental property directly managed by the taxpayer (eg, US citizen managing her rental property in Spain by herself) - the books and records are not necessarily separate... I have no absolute answer to provide so here are the arguments:
The argument for: because you're paying the local property tax office, condo fees, cleaning, maintenance, utilities etc... in foreign currency these records are not in USD and therefore are separate. They are separated from your US income statement up to the point you convert to USD.
The argument against: it would take a systematic accounting entry process to create "separate books and records" such as in the case of a local property manager providing all financial reporting to the owner in functional currency.
See Reg §1.989(a)‐1 (e), example 6) - this IRS-provided example is specific to a foreign brokerage account. I have not yet seen anything from the IRS that specifically discussed rental properties. Guya - have you?