Among the myriad issues facing United States expatriates is the issue of the taxation of overseas real estate. While taxpayers must comply with the laws of the location of the property, they also must properly report and pay taxes on any profits to the United States. And because real property rents are not considered “earned income” profits can not be excluded based on the foreign income exclusion. Taxpayers should be vigilant about properly recording all expenses and properly accounting for depreciation.
There are a few tax rules for owning rental property overseas that differ from those for rental property owned in the United States:
1. Rental property located overseas must be depreciated over a 40 year period, rather than the shorter time period applicable to property located in the United States.
2. To prevent double taxation, taxpayers can take a US tax credit for taxes paid to the foreign country on net rental income received after deducting applicable expenses. The maximum value of this credit is the amount of US tax on the net rental income received after deducting expenses.
3. Special rules apply to property owned by a corporation or other entity, such as an LLC or real estate trust.
Aside from these rules, many of the tax benefits available for property owned in the US are also available for property owned overseas. For example:
1. For individuals, rental income and expenses are reported on a Schedule E. The net rental income after applicable expenses have been subtracted is taxable.
2. Allowable expenses are the same as for US property and include, among others, advertising, repairs, management fees, service fees, insurance, depreciation, and other expenses.
3. Sales of foreign real estate qualify for favorable capital gains tax treatment.
4. If the property qualifies as the taxpayer’s primary residence and the taxpayer owned and lived in the home for at least two of the previous five years prior to sale, taxpayers can exclude up to $250,000 of capital gains from their income upon sale. Certain married taxpayers can received up to a $500,000 exclusion.
While some rules differ, the US tax consequence of owning property overseas are similar to those for owning property in the United States. We have experience helping US taxpayers abroad navigate these issues. Please contact us at firstname.lastname@example.org for more information or for help with your US taxes.
This article is not legal advice, and the information provided is for informational purposes only. The topics discussed may or may not apply to a particular taxpayer’s situation. Tax rules change frequently, and you should always consult the applicable rules currently in effect. If you have any questions about your tax situation, please contact us, the IRS, or another tax advisor.