When it comes to moving abroad, you have plenty of considerations to make that may have a huge impact on your life. One of those things is the inevitable: taxes. Understanding US expat taxes can be confusing enough, but throwing another element into the mix, like buying or selling a home abroad, can make things even more complicated. Here are the facts you should be aware of before you embark on a real estate transaction!
Keeping Accurate Records is Key
As you’re probably aware, holding onto any type of records related to finances and taxes is so important! This is especially true for purchasing property – you’ll undoubtedly need to reference your purchase documents at some point, so hold on to them. Having these records will help you accurately calculate capital gains when you sell the property, even if it was used as a personal residence. If the home was purchased as a primary or secondary residence, you will be able to use mortgage interest and/or real estate taxes paid annually as itemized deductions on your US expat taxes.
Always Be Aware of Foreign Exchange Rates
The value of the US dollar against currencies in other countries is constantly in flux. If you’re in a position where you aren’t location-specific on your home purchase, it could be a great idea to find a location where the local currency is weak against the US dollar, so your money will stretch further!
Ask a Professional
When it comes to purchasing real estate abroad, you’ll want to work with a qualified real estate agent as well as an attorney. Since regulations involving real property vary across the world, this step is critical. Some countries only allow residents to purchase property, and others may require foreigners to complete an application that takes at least a month to process. This is where consulting with a professional with expertise on that country’s laws come into play! Also, some countries don’t have any regulation over the real estate industry, so making sure your agent checks out is important before working with them!
Visit the Home
For many buyers, this is the most exciting part of the process – finding and visiting the perfect home! It can certainly become a time-consuming process, though. But it’s very important to visit the home in person before deciding to purchase. Pictures are great, yes – but even the best photos won’t make up for seeing the home in person. You never know how recent the images are, and it’s hard to tell if the location is one you’d want to live in. Making sure the home fits your criteria is very important, especially if this will be your primary residence or a retirement home!
Find a Tax Advisor in Your Host Country
Even if you aren’t generating income from the property, some countries may have a filing obligation just for owning the property. Additionally, there are countries that offer tax breaks as a way to encourage foreign investment. Therefore, working with a tax professional in your host country is important to be sure you’re taking advantage of potential benefits available to you. It’s also a good way to plan for the future, if you decide to sell the property and need to understand capital gains tax and tax withholding requirements for foreigners.
Keep Accurate Records
You’re not just seeing things – yes, this is the same tip provided for buyers above! Arguably one of the most important things you can do when it comes to preparing your US expat taxes is make sure you hold on to any type of financial record that you might need in order to file taxes. When it comes to selling property, you must report this on your tax return – whether you live in the US or abroad. You can also add improvements you’ve made to the basis. The IRS does allow an exclusion of some of the gain on the sale of a personal residence, but there are times when this isn’t enough – so keeping records is key so you can show you had a new roof installed or a room addition a few years back.
Make Plans Ahead of Time
Don’t wait until after selling your property to consult with a tax professional! It can certainly be done, however, it’s just preferable to reach out ahead of time. After all, the sooner you can plan for a potential tax liability, the better!
Consider Foreign Currency Fluctuations
When it comes to reporting the sale of a foreign property on your US expat taxes, there will be two types of gains to calculate: the capital gains associated with the property and the exchange rate gain. To calculate capital gain:
Capital Gain = Sales Price – Purchase Price and Improvements Made
However, the exchange rate gain can come as a surprise to most taxpayers – this will be calculated by converting the amount of the original loan and then converting again at the time the loan was paid off. In some countries, this can mean a significant capital gain!
Pay Attention to Bank Reporting Requirements
What are your plans for the property sale proceeds? Will you leave it in a foreign bank account and invest it abroad? Note that this may require some additional US reporting requirements, like the FBAR or FATCA Form 8938. While transferring funds into the US isn’t considered a taxable event, you may have to report it if the amount exceeds $10,000. This is an event where you may want to discuss requirements with a tax professional.
Don’t Forego Professional Help
Yes, this is another repeat! Just as you’d want to enlist the help of a professional for buying property, you’ll want to do the same for selling. Having a real estate agent on your side is helpful in establishing the best and most effective marketing strategy and can provide great tips on how to help your home sell quickly. Utilizing an attorney is helpful as well, as they can advise on contractual obligations and ways to protect yourself from deception.
Have More Questions about Buying and Selling Property Abroad?
Our team of expat-expert CPAs and IRS Enrolled Agents are here for you every step of the way. Contact us today and to learn more about how buying and selling foreign real estate may affect your US expat taxes.