Owning a rental property, whether in the US, or an investment property abroad can be a profitable investment, but knowing how it will impact your US expat tax return is important when making this decision. While it’s very exciting to start planning for this venture, be sure to learn the tax implications to avoid any mistakes in the long run. Here are 5 things to be aware of:
1. Record Keeping
If you have a property management company managing your rental, they will give you an organized statement at the end of the year, which makes it a little easier to keep track of. If you are the individual managing your rental, you are responsible for keeping accurate and detailed information. Staying organized throughout the year will definitely help in the long run. Remember, if you rent out your property you will need to report income and loss on your US Tax Return.
As soon as you list your home for rent, you can begin the depreciation calculation, which extends over a 27.5-year period. The depreciable amount is determined by the lesser of the fair market value of the home or the adjusted basis (your purchase price adjusted for any improvements).
3. Receiving Investment Income
The IRS considers the money you receive as rent payment ‘investment income’. If your renters pay for any services or repairs, that will also need to be reported as income on your US expat tax return. Most property owners require a security deposit when a renter moves in – if you return this when the renter moves out, you will not need to report this as income. However, if you keep the security deposit due to damaged property, this amount must be reported as income on your expat tax return. Find out more about rental income on the IRS website.
4. Deductible Expenses
There are other rental property expenses that are considered to be deductible that can be written off on your expat tax return. These include:
- Mortgage insurance
- Homeowner association dues
- Money spent on travel to collect rent or make property repairs
If you have property expenses that can be paid at the end of the year (even if they’re for the upcoming year), paying them prior to the end of the year means you can deduct them from your US expat tax return and lower your investment income for the year.
5. Claiming a Loss
You can claim up to a $25,000 loss on your US expat tax return if you’ve ‘actively participated’ in rental real estate. What exactly does that mean? You must own at least 10% of the property and actively make management decisions, such as approving new tenants and property improvements or creating lease provisions. If you’re not an active participant, your loss can’t exceed the amount of income generated on your expatriate tax return.
Looking for More Information about Investing in Property Rentals?
As you consider the decision to invest in a rental property, continue reading on with our free Complete Guide for Real Estate Investments for Expats.