Tax for US Citizens Living Abroad: Reporting Rental Income, Expenses & Losses

Rental Tax for US Citizens Living Abroad

How to Report Rental Income, Expenses, and Losses on Your US Expat Taxes

As you may know, US citizens who live abroad are required to pay US taxes on their foreign earned income. Many expats rent out their US homes while living abroad, and just as many expats own rental properties overseas. Regardless, if you’re an expat with rental income, you are required to report all rental income, expenses, and losses on your US expat taxes.

Please be aware that you should be diligent in keeping records of your rental activity, because many of the losses and expenses associated with your rental activity can be deducted from your US expat taxes. Some of these deductions include HOA (Homeowner Association) dues, maintenance costs, and property depreciation. The list of deductible losses and expenses can be extensive, so diligent record-keeping is a must.  This article is by no means a complete guide to reporting your rental activity, so getting in touch with a professional tax preparer is highly recommended.

Using Form 1040 Schedule E to Report Your Rental Activity

If you are an individual reporting for-profit rental income, you will list your rental income, depreciation, and expenses on Schedule E (Supplemental Income and Loss) of Form 1040. This applies to all basic residential rental activity. Schedule E allows you to list the information for up to 3 rental properties, so if you are reporting on more than 3 you must attach as many additional Schedule E forms as are necessary to report your properties.

Using Form 4562 to Claim Depreciation

As an expat with rental properties, you might be able to deduct the losses and depreciation associated with your properties. If you want to claim the depreciation of your rental properties, you will complete Form 4562 (Depreciation and Amortization) and attach it to your Schedule E. Depreciation obviously refers to the depreciation of your rental properties, but it can also refer to the depreciation of the vehicle with which you drive to collect rent or make repairs because the IRS counts such travel costs as part of your rental expenses. You will complete and attach Form 4562 if you are claiming any of the following: depreciation on your property; depreciation on your car; any other car-related expenses (standard mileage rate, lease cost, etc.). Ask a professional tax preparer or check out Publication 946for more detailed information on Form 4562.

Claiming Rental Losses: Limitations and Forms

If you’re reporting rental income on your US expat taxes, you will likely be able to deduct the expenses associated with your rental activity. There are, however, limitations on the amount you can deduct. If you’re claiming losses on your rental properties, you might be required to attach Form 6198 (At-Risk Limitations) or Form 8582 (Passive Activity Loss Limitations), or both.

At-risk rules only apply to properties rented after 1986. The at-risk rules might apply to you if you have losses from an activity “carried on as a trade or business or for the production of income,” investments that are not fully at risk, or both. If the at-risk limitations apply to you, you will complete Form 6198 and attach it to your Schedule E.

Passive activity limitations refer to the fact that rental activities are considered “passive.” Accordingly, deductions on such activities have limitations that prevent you from offsetting your income or taxes with losses or credits garnered from passive activities. In laymen’s terms, losses from passive activities, such as rental properties, will not lower your income, nor will credits gained from passive activities overwrite your income taxes.  Instead these loses will accrue to offset future gains from your rental properties.  This means that you will still be required to report all other income in full and pay taxes on it.

If there is an excess loss or credit it will be carried to next year’s return. Claiming losses on your rental properties will require you to complete Form 8528 and attach it to your Schedule E. The only two exceptions for passive activity limitations are for real estate professionals and real property trades or businesses. For more information about the at-risk rules and passive activity limits, ask a professional tax preparer or see Publication 925.

Still Have Questions About Your US Expat Taxes?

Bear in mind that US expat taxes can be quite complicated, and mistakes can be both costly and time-consuming. Luckily, we’re here to help make this as straightforward and hassle-free as possible. If you have any questions about your US expat taxes, please contact us.

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