While living and working abroad, you may decide to invest in a home or other type of property. Foreign tax laws regarding the reporting of rental income vary depending on where the rental income is earned. For instance, some countries have minimum income threshold requirements that should be met before rental income needs to be reported. If you choose to rent out your foreign property, you will need to consider both the host country and US tax ramifications of the income and expenses related to this foreign property ownership as well as the ownership structure. Read on to find out what expats need to know about foreign rental income and reporting requirements!
IRS Foreign Rental Income: Property Classifications
Like any other US citizen or resident who owns US rental property, with or without a foreign spouse, you will need to understand the ins and outs of IRS foreign rental income generated by renting out your foreign-located rental property. If you own a foreign vacation/second home that you rent out, you will need to report income from this vacation/rental home if your rental income meets the minimum days threshold requirements as shown in the chart below:
Foreign Property Ownership Structure
How you report your foreign rental income will be determined by the structure used to hold the ownership of the foreign property real estate. A popular choice is a Limited Liability Company (LLC). If the foreign rental property is owned directly or through a Single Member Limited Liability Company (which is considered a disregarded entity for US income tax purposes), you will report your rental income and expenses on Schedule E attached to your US tax return. If the ownership is through a US LLC with more than one member (except for LLCs created by spouses in US community property states) or through a foreign corporation, foreign partnership, or foreign trust, then you will have additional filings and reporting requirements (which may include Forms 1120, 1065, 5471, 8865 or 1041).
How to Report Foreign Rental Income From Real Estate
Report your foreign property rental income and expenses just like you would with a US rental—with a few exceptions. How do you report foreign rental income? Foreign rental expenses need to be reported in USD and can include such expenses as claiming foreign mortgage interest, local foreign property taxes, repair expenses, management fee expenses, and travel expenses incurred to inspect your foreign property (if personal days are involved, you will only be able to deduct expenses related directly to the management of your foreign property). One of the main differences is that the depreciable building portion of your cost basis in this foreign rental property must be depreciated over a 30-year recovery period. (Land cost is not depreciable.)
You will need to report your foreign rental income and expenses in USD. The IRS has no official exchange rate. In general, use the exchange rate prevailing (i.e., the spot rate) when you receive the property, made any capital improvements, and sold the property. The IRS’ website has more information about Foreign Currency and Currency Exchange Rates and Yearly Average Currency Exchange Rates.
If you are required to pay foreign income taxes (or capital gains taxes on a foreign rental property sale), you may be able to offset any US income taxes paid on this foreign-sourced income with a Foreign Tax Credit to prevent this real estate income being subject to double taxation.
Other US Reporting Requirements
You may have an FBAR reporting requirement if you set up a foreign bank account for receiving income and paying expenses related to the foreign rental property. Additionally, even though foreign real estate is not considered a foreign financial asset required to be reported on Form 8938, if the foreign rental is held through a foreign entity such as a foreign corporation, partnership, or trust, then your interest in the foreign entity is a specified foreign financial asset that might be reportable on Form 8938.
Do You Need Help With Your US/Foreign Rental Property?
Have you downloaded our free guide yet? That is a great first step to getting your questions answered about real estate and more. But, if you have specific questions about how foreign property ownership will affect your US tax filings, or if you would like help completing your US expat tax return or with foreign rental income, please contact us.