US Tax Implications of Selling an Overseas Rental Property

Many US taxpayers own foreign property, and oftentimes choose to rent those properties to offset ownership costs. While they likely know that they must report rental activity on their US expat tax return, there is often confusion about how to report the gain or loss from the sale of this property. In this video, David McKeegan explains the details of the 3 most important things you need to know about US taxes when you sell a property overseas.

VIDEO TRANSCRIPT

Hi everybody. My name is David McKeegan, I’m with Greenback Expat Tax Services. Our question today is, “I’m selling an overseas rental property. What are the US tax implications?” The first thing you have to know is that any gain or loss must be converted to US dollars. You can have a gain or loss on the value of the property, maybe the value of the property went up or down. Or, you can have a gain or loss that’s caused by a currency fluctuation changing from your local currency to US dollars.

The rate you use is the exchange rate on the day of the sale, you can’t use a yearly average or anything like that. You have to use the exchange rate on the day of the sale. The gain or the loss on the property is going to be the difference between your sales proceeds and your adjusted basis in the property. Your adjusted basis is calculated from when you acquire the property, then you add in any capital improvement you’ve made. If you refit a kitchen or something like that, you can add that into the cost of the basis of the property. You subtract out any depreciation claims that you’ve taken on the property since you’ve owned it.

The depreciation you’ve claimed over the past five years is subject to recapture rules, which means that you report some of the gain when you sell the property at ordinary income rates based on your individual income tax rate and some of the gain at the capital gains tax rate of 25 percent. You can deduct selling expenses, including commissions paid on the sale. If it’s a foreign property, the gain may be taxed in the country in which you live. If that happens, you can use the Foreign Tax Credit to offset any taxes that you paid to the local country, the country in which the property is, against your US taxes. The last thing I’ll note is that this type of transaction, any gain or loss from a rental property, is going to be considered a passive transaction. It’s not earned income, so you will not be able to use the Foreign Earned Income to exclude any of the income from tax. This is a passive transaction, not an earned income transaction. That’s all for today!

If you have any questions, please let us know. Thank you.

 

 

Free Guide: The 25 Things Every Expat Needs to Know About Taxes

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