As an American living abroad, you may be renting out your home back in the States or possibly even have an investment property in your host country. After all, renting a good way to maintain the home while offsetting the monthly mortgage payments you are making on the property. There are some things you should be aware of, though, as you prepare to file your US tax return – read on for the details.
Keeping Accurate Records
When it comes to taxes, it’s always important to keep track of your records and any documents that are necessary when you file your tax return. This is especially true if you’re renting out your residence, since you’ll need to report income and losses on your taxes. This process will be somewhat easier for you if you have a property management company handling the rental and upkeep of your home, since you’ll be provided with an organized statement at the end of the year. If you do not have a company managing your rental, you’ll have a greater responsibility of keeping accurate documentation. Maintaining a spreadsheet with detailed information can save you time and money when the time comes to file your US tax return.
As you may expect, any amount of money you receive as rent payment is considered to be income – which the IRS actually classifies as investment income. Additionally, any services or repairs that your tenant pays you for must be reported as income. If you return a tenant’s security deposit upon him or her moving out, you do not report this as income. However, if you keep the security deposit because the tenant damages the property or defaults on payments, you will need to report this as income on your US tax return.
As soon as you offer your home for rent, you can begin calculating depreciation of your property over a 27 and-a-half-year period. The amount you can depreciate is determined as the lesser of the fair market value of your home, or the adjusted basis (your purchase price, adjusted for any improvements).
In addition to the depreciation you can claim on your taxes, you should keep close account of your expenses, as these are deductible. These include:
- Mortgage insurance
- Homeowner association dues
- Money you spend on travel to collect rent or repair the property
If you have any expenses for your property that can be paid at the end of the year (even if they’re for the upcoming year), it’s a good idea to pay them prior to the end of the year. That way, the expenses can be deducted from your 2016 tax return, lowering your investment income for the year.
You are able to deduct up to $25,000 of loss on your US expat taxes if you are considered to have actively participated in rental real estate. What does this mean? For starters, you must own at least 10% of the property and be active in making management decisions. If you are not considered to be an active participant, your loss cannot exceed the amount of income generated by the actively on your US tax return. A word of caution – if you allow a management company to maintain your property, they generally manage all aspects and alleviate you of any decision-making. If you may be facing a loss on the property, you will want to have a discussion with property management about remaining active in making management decisions, for the tax benefits. In order to be an active participant, you’d need to play a role in approving new tenants, creating lease provisions and approving any property improvements.
When it comes time to file your US tax return, you’ll need to use Form 1040 Schedule E to report your rental income, depreciation and expenses. You can report up to three rental properties on one Schedule E, so if you maintain more than three properties, you’ll need to attach additional Schedule E forms.
Still Have Questions About Your Rental Property Taxes?
We can help! Contact us today – one of our expat-expert CPAs or IRS Enrolled Agents will be in touch to help you determine how your rental property affects your US tax return.