Tax Considerations for Owning and Renting Property Abroad as a US Citizen
The allure of buying property abroad has captured the interest of thousands of Americans across the country.
Whether it's a charming cottage in the French countryside, a historic villa in picturesque landscapes like Spain, or perhaps another enticing destination altogether, the concept holds undeniable appeal.
The idea of having a second home in a foreign land is undoubtedly captivating, however, as the dream of buying or renting property overseas becomes a reality, it's crucial to understand the financial and regulatory landscape - particularly when it comes to tax obligations.
In this article, we will answer some questions about the tax implications of owning property abroad that American investors need to be aware of.
Do I have to report foreign real estate to the IRS?
American citizens aren't required to declare foreign property to the IRS (Internal Revenue service), as long as they're not generating any income from it. One exception could be if there's a Homebuyer Credit available for that year.
However, in the event of selling the property, they are obligated to document the resulting gains or losses based on how much you initially paid on Schedule D of their US tax return.
You may need evidence of earnings from the property and records of invested improvement costs will be necessary.
That's why it's important to keep all the paperwork from when you first bought the property, along with any other costs you had when purchasing the property in another country.
It's likely that you'll need to secure a bank account in the foreign country when purchasing property overseas. This will be beneficial for the following purposes:
- Finalizing the property sale
- Handling matters related to a mortgage from a foreign institution
- Managing payments for property taxes in the foreign country
In this situation, you might also be required to complete an additional tax form for the United States.
If you're a US citizen and your foreign bank accounts hold a cumulative amount of $10,000 or more, you'll need to report this by submitting FinCEN Form 114, more commonly known as the Foreign Bank Account Report (FBAR).
What are the tax implications of buying property overseas?
Local taxes and laws will have a big impact on buying your new home. For example, in many countries, instead of buying a house under your name, you might need to buy it through a holding corporation.
This means you, as a US citizen, would own a foreign corporation, which comes with extra paperwork and requirements.
When you're buying a property overseas that belonged to someone else before, there's a possibility you'll have to pay a transfer tax.
Once again, this tax varies across countries, but you can generally anticipate paying somewhere between 1% to 10% in taxes. Especially if you intend to buy a pricey property, factoring in the transfer tax is a smart move before making a full commitment.
Moreover, it's worth noting that mortgage interest might still be eligible for deduction on your US tax return, regardless of where your foreign property is located.
The specific deductions and amounts hinge on whether you're using the property as your main residence or for investment purposes.
In the scenario where you purchased the house using a currency other than US dollars, you'll need to convert the mortgage amount when claiming these deductions on your US tax return.
What about the tax implications of owning property abroad?
Buying property abroad works differently than in the US and might lead to extra taxes. Always check the laws and insurance rules in the host country.
Before you buy, talk to the US embassy in that country to understand local laws, foreign property tax, and what's needed.
These costs vary by country. Researching and planning can save you money on your US expat taxes.
You can still deduct mortgage interest and points on your US taxes, even if your property is in another country. Remember to convert the amounts to US dollars before claiming the deduction.
For help with your US tax return, the IRS gives exchange rates for many countries. They also link to a reliable website with more info on historical rates.
I have rental income from overseas property. What are the tax implications when renting property abroad?
Some Americans might opt to purchase property in another country, not to live in themselves, but to rent it out and generate extra income. If you have a foreign rental property, you'll need to report your income from foreign rentals on Form 1040 Schedule E.
They will also need to file a rental income tax return in the country where the property is located.
They shouldn’t be taxed twice because of the double taxation agreements which the United States has with many countries.
The IRS categorizes foreign rental income into four tax treatments, based on the property's usage and the number of days it's rented or lived in:
- Rental property: The property was solely rented out for 1 - 365 days in the tax year, with no owner occupancy.
- Vacation home and rental property: The property was rented for over 15 days, while the owner spent less than 15 days living there.
- Vacation home and secondary residence: The owner used the property for over 14 days and rented it for more than 15 days.
- Not reportable: If the owner spent over 15 days in the property and rented it out for less than 15 days in the tax year.
If you've paid foreign taxes on the rental income from your overseas property, you can potentially qualify for Foreign Tax Credits.
Other expenses related to your foreign rental, like insurance, maintenance, management fees, and repairs, can be deducted from your US tax return.
If you're planning to rent out your foreign property, it's a good idea to consider hiring a tax professional. They will handle all the necessary filings, allowing you to confidently rent out your foreign property with peace of mind.
What are the tax implications of the depreciation of a foreign rental property?
If your property falls under the category of a rental property, you have the option to claim depreciation on your US tax return.
Unlike properties in the United States, which are depreciated over a span of 27.5 years, foreign residential properties follow a 30-year depreciation timeline.
It's important to note that only the value of the building itself can be depreciated.
Learn more about foreign rental property depreciation and income tax.
What are the potential tax deductions available for an overseas investment property?
While the taxation and reporting principles for overseas rental income align quite closely with those for rental properties in the US, there are a few exceptions to note.
When it comes to earning rental income abroad, you can leverage the following deductions on your US tax return:
- Costs for advertising
- Expenses tied to auto and travel
- Cleaning and maintenance outlays
- Paid commissions
- Insurance expenditures
- Legal and professional fees
- Mortgage interest payments made to banks or financial institutions (secured by the rental property)
- Repairs
- Real property taxes
- Utility costs
- Depreciation costs
- Other specific rental-related expenses, like condo fees or landscaping expenses.
In simple terms, you should include both the money you earn and all the related costs, including depreciation.
Can I deduct foreign property taxes?
The option to deduct foreign property taxes ceased in 2017. The possibility of this deduction coming back depends on Congress and could potentially resurface after the 2025 tax year, or it might not.
Who can help me file my overseas landlord tax return?
If you rent out property overseas your tax situation is a little bit more complex because you need to file income tax returns both in the US and in the country where your property is located.
To save on taxes you can avail of double taxation agreements and you can avail of tax deductions and this is where a tax professional can help.
Property Tax International (PTI Returns) has a team of tax advisors who can file your tax returns and deal with the tax paper if your property is located in:
- France
- Spain
- UK
- Ireland
- US
- Germany
- Poland
- Hungary
They provide a first-class tax service with trusted tax experts at a more affordable rate compared to local accountants or lawyers.
Property Tax International (PTI Returns) is part of CluneTech (formerly known as Taxback Group), employing over 1,500 people in more than 20 countries worldwide.
If you have any questions, you can request a no-obligation consultation with their team.
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