Knowledge Center Financial Accounts & Investing Abroad

Foreign Rental Income Tax: How to Report & Reduce Your U.S. Tax Bill

U.S. citizens are required to report all foreign rental income to the IRS, regardless of the location of the property. The good news is that most expat landlords owe little or nothing after taking full advantage of the deductions and credits available to them.

You can deduct common rental expenses like management fees, repairs, maintenance, insurance, and depreciation. These often add up quickly and significantly lower your taxable income. Any remaining U.S. tax is usually wiped out by the Foreign Tax Credit, which lets you use the taxes you already paid in your country of residence to offset your U.S. bill.

Whether you’re renting out your former home while living overseas, hosting guests on Airbnb, or managing a long-term rental portfolio abroad, this guide shows you how to report your foreign rental income, which deductions apply, how depreciation works, and the strategies that help reduce or even eliminate your U.S. tax liability.

Do I Have to Report Foreign Rental Income to the IRS?

Yes. All U.S. citizens and Green Card holders must report their worldwide income to the IRS, including rental income from properties located outside the United States. This requirement applies regardless of where you currently live, where the rental property is located, what currency you receive the rent in, or whether you’ve already paid taxes to a foreign government.

Taxable foreign rental income includes:

Monthly rental payments from long-term tenants
Short-term vacation rental income (Airbnb, VRBO, Booking.com earnings)
Security deposits you keep for damages
Advance rent payments
Rental income received in foreign currency (must be converted to USD)

The IRS treats foreign rental income as passive income, which means it’s taxed at your ordinary federal income tax rates. Unlike wages or self-employment income, rental income doesn’t qualify for the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to $130,000 of earned income for the 2025 tax year.

However, this doesn’t mean you’ll necessarily owe U.S. taxes on your rental income. The combination of expense deductions, depreciation, and the Foreign Tax Credit typically reduces or eliminates U.S. tax liability for most expat property owners.

Example: Your foreign rental property generates $30,000 in annual rent. After deducting $12,000 in expenses (property management, repairs, insurance, property taxes) and $10,000 in depreciation, your taxable rental income is $8,000. If you paid $2,000 in foreign taxes on that income, the Foreign Tax Credit can offset your U.S. tax liability, potentially bringing what you owe to $0.

Earning rental income abroad? We’ll help you report it correctly on your U.S. return.

Start with expert guidance so you know exactly what needs to be filed.

How Do I Report Foreign Rental Income on My Tax Return?

You report foreign rental income on Schedule E (Supplemental Income and Loss), the same form used for U.S. rental properties. Schedule E attaches to your Form 1040 annual tax return.

Filing Deadlines for the 2025 Tax Year

April 15, 2026: Standard filing deadline for 2025 tax year
June 15, 2026: Automatic two-month extension for Americans living abroad (no forms required)
October 15, 2026: Final deadline with Form 4868 extension request

Learn more about expat tax deadlines.

What Schedule E Requires

Schedule E requires detailed information about each rental property, including the property address, type, days rented, days used personally, total rent received, and all expenses.

Deductible expenses include:

Property management fees and commissions
Cleaning, maintenance, and repairs
Insurance premiums
Mortgage interest
Property taxes paid to the foreign government
Utilities, advertising, legal fees
Depreciation

All income and expenses must be converted to U.S. dollars. The IRS accepts the use of the annual average exchange rate for regular monthly income and expenses. Find current exchange rates on the IRS website.

Currency conversion example: You earned €24,000 in rent and spent €6,000 on repairs in 2025. Using the average 2025 EUR/USD exchange rate of 1.08, your rental income is $25,920, and expenses are $6,480, yielding $19,440 in rental income before depreciation.

What Vacation Home Tax Rules Apply to My Foreign Property?

If you use your foreign property personally in addition to renting it out, special IRS rules determine how you report the income and which expenses you can deduct.

Vacation Home Classification

Owner’s Personal Use	Days Rented Out	Tax Treatment
None	Any number of days	Regular rental property (report all income and expenses)
Any number of days	Less than 15 days	Income not reportable; no rental expense deductions allowed
Less than 15 days OR less than 10% of rental days	15+ days	Mixed-use rental property (report income with limited expense deductions)
More than 14 days AND more than 10% of rental days	15+ days	Vacation home (rental expense deductions limited to rental income)

Example 1: Minimal rental use: You rent your beach house for 12 days and use it personally for 30 days. Because you rented it for fewer than 15 days, you don’t report the rental income on your tax return, but you also can’t deduct any rental expenses.

Example 2: Primary rental with minimal personal use: You rent your property 200 days and use it personally 10 days. Because your personal use is less than 14 days and less than 10% of rental days, you report it as a regular rental property with full expense deductions, including depreciation that can create a tax loss.

What Deductions Can I Claim for Foreign Rental Property?

The IRS allows you to deduct all ordinary and necessary expenses for maintaining and operating your rental property.

Common Deductions

Property Management Fees: Fees paid to property managers or rental management companies are fully deductible.

Repairs and Maintenance: You can deduct costs for repairs that keep the property in good working condition (fixing plumbing leaks, repainting, replacing broken appliances). However, improvements that add value must be capitalized and depreciated over time.

Mortgage Interest: Interest paid on loans used to purchase, improve, or refinance your rental property is fully deductible with no dollar limit.

Property Taxes: Foreign property taxes paid to your property’s local government are deductible on Schedule E. While the 2017 Tax Cuts and Jobs Act eliminated the deduction for foreign property taxes on personal residences, rental property taxes remain fully deductible.

Insurance, Utilities, Travel, Professional Services, Advertising: All fully deductible when related to your rental property.

Repairs vs. Improvements

Repairs (deductible immediately):

Fixing a broken air conditioner
Repainting walls in existing colors
Replacing broken tiles or damaged gutters

Improvements (must be depreciated):

Adding a new room or bathroom
Installing a new HVAC system
Replacing the entire roof
Installing a swimming pool

How Does Depreciation Work for Foreign Rental Property?

Depreciation is one of the most powerful tax benefits for rental property owners. It allows you to deduct the cost of your property’s structure (not land) over time, even though you haven’t actually spent any money that year.

Depreciation Basics

Critical rules for foreign residential rental property:

Depreciation period: 30 years under the Alternative Depreciation System (ADS)
What you depreciate: Building value only (land never depreciates)
When you start: When you place the property in service as a rental
How much per year: Cost basis divided by 30

Example: You purchased a foreign rental property for $450,000. The land value is $60,000, meaning the building value is $390,000. Your annual depreciation deduction: $390,000 ÷ 30 = $13,000 per year.

This $13,000 depreciation deduction reduces your taxable rental income each year. If your property generated $18,000 in net income after expenses, depreciation brings your taxable income down to $5,000.

Foreign vs. U.S. Property Depreciation

U.S. residential rental property: 27.5 years
Foreign residential rental property: 30 years (ADS requirement)
U.S. commercial property: 39 years
Foreign commercial rental property: 40 years

Depreciation Recapture When You Sell

When you eventually sell your rental property, the IRS “recaptures” the depreciation you claimed, taxing it at a flat 25% rate. Any remaining gain above your adjusted basis is taxed at capital gains rates (0%, 15%, or 20% depending on your income).

Example: You purchased a property for $400,000 ($340,000 building, $60,000 land). After 10 years, you claimed $113,333 in depreciation. You sell for $550,000.

Tax calculation:

Depreciation recapture (25%): $113,333 × 25% = $28,333
Remaining gain: $150,000 taxed at 15% = $22,500
Total tax: $50,833

Learn more about capital gains on foreign property sales.

Can I Use the Foreign Tax Credit for Rental Income?

Yes. The Foreign Tax Credit (FTC) is one of the most effective tools for eliminating double taxation on foreign rental income. If you paid income tax to a foreign government on your rental income, you can claim a dollar-for-dollar credit against your U.S. tax liability.

How the Foreign Tax Credit Works

Requirements:

The foreign tax must be an income tax (property taxes don’t qualify)
The tax must be legally owed and paid to a foreign government
The tax must be on income that’s also subject to U.S. taxation

Example:

Your foreign rental property generates:

Gross rental income: $35,000
Expenses: $10,000
Depreciation: $12,000
Net taxable income: $13,000

You paid $2,600 in foreign income tax on this rental income (20% rate).

Your U.S. tax calculation:

U.S. tax on $13,000 at 22% bracket: $2,860
Foreign Tax Credit: -$2,600
Net U.S. tax owed: $260

The FTC reduced your U.S. tax by $2,600, preventing double taxation. In high-tax countries, the FTC often eliminates U.S. tax liability entirely.

Important Limitations

The FTC is limited to the U.S. tax attributable to your foreign income. It can reduce your U.S. tax to $0, but won’t create a refund. However, unused credits can be carried back one year or carried forward 10 years.

To claim the FTC on rental income, you must file Form 1116 with your tax return. You must choose between claiming the FTC or deducting foreign taxes on Schedule A. The FTC is almost always more beneficial.

What Other U.S. Reporting Requirements Apply?

Beyond Schedule E, owning foreign rental property may trigger additional IRS reporting requirements. Failing to file these documents can result in significant penalties.

FBAR: Foreign Bank Account Reporting

If you deposit rental income into a foreign bank account and the total value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR (FinCEN Form 114).

Key details:

Deadline: April 15 (automatic extension to October 15)
Filed separately through FinCEN’s BSA E-Filing System
Penalties for non-compliance start at $16,536 per year

FATCA: Form 8938

If your total specified foreign financial assets exceed certain thresholds, you must file Form 8938.

Thresholds for expats living abroad:

Single: $200,000 on the last day of the year OR $300,000 at any time
Married filing jointly: $400,000 on last day OR $600,000 at any time

Learn more about FBAR vs. FATCA differences.

Foreign Entity Ownership: Forms 5471 and Form 8858

If you own your rental property through a foreign entity (foreign LLC, corporation, or trust), additional complex reporting requirements apply:

Form 5471: Required for U.S. persons with ownership in foreign corporations. Non-filing penalty: $10,000 per form.
Form 8858: Required for foreign disregarded entities. Similar penalties apply.

These forms are highly complex and should only be prepared by experienced international tax professionals.

What About State Taxes on Foreign Rental Income?

State tax obligations depend on your former state of residence and how thoroughly you severed ties when you moved abroad.

When State Taxes Apply

If you haven’t properly terminated state tax residency, you may owe state taxes on all worldwide income, including foreign rental income. “Sticky states” like California, Virginia, and New Mexico are particularly aggressive.

To properly terminate state tax residency, cancel your state driver’s license, close state bank accounts, update your mailing address, don’t maintain a home in the state, and file a final part-year resident return.

Learn more about expat state tax obligations.

What Happens When I Sell My Foreign Rental Property?

Selling foreign rental property creates several tax reporting requirements and potential tax liabilities.

Capital Gains Tax

When you sell rental property for more than your adjusted basis (purchase price plus improvements minus depreciation), you realize a capital gain subject to U.S. taxation.

Long-term capital gains rates (property held more than one year):

0% if taxable income is under $47,025 (single) or $94,050 (married filing jointly)
15% for most middle-income taxpayers
20% if taxable income exceeds $518,900 (single) or $583,750 (married filing jointly)

Plus depreciation recapture at 25%.

Learn more about taxes on foreign property sales.

Section 121 Exclusion for Former Primary Residence

If your rental property was once your primary residence, you may qualify for the Section 121 exclusion, allowing you to exclude up to $250,000 of gain ($500,000 if married filing jointly).

Requirements:

You owned the property for at least 2 of the past 5 years before the sale
You lived in it as your primary residence for at least 2 of the past 5 years
You haven’t claimed another Section 121 exclusion within the past 2 years

This exclusion applies to foreign properties just as it does to U.S. properties.

Learn more about capital gains exclusions.

Get Expert Help with Foreign Rental Income Taxes

Reporting foreign rental income involves multiple forms, complex calculations, and strategic decisions about depreciation and tax credits. The interaction between U.S. tax rules, foreign tax obligations, and currency conversions creates numerous opportunities for mistakes, but also for significant tax savings when done correctly.

Greenback is an American company founded in 2009, serving U.S. expats. Many of our CPAs and Enrolled Agents are expats themselves, living in 14 time zones and experiencing firsthand the challenges of managing foreign property while staying U.S. tax compliant.

Whether you need help with:

Reporting foreign rental income on Schedule E
Calculating depreciation for foreign property
Claiming the Foreign Tax Credit
Filing FBARs and FATCA forms
Planning for a foreign property sale

…we can guide you through every requirement and ensure you’re taking advantage of every available deduction and credit.

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.

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This article provides general information and should not be considered specific tax advice. Foreign rental income tax rules are complex and subject to change. Always consult with qualified tax professionals regarding your particular situation.

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