Tax for Expat Property Owners: Impact of Selling Assets Outside the US

US citizens and Green card holders are required to report and pay taxes on their worldwide income. This includes the sales of property, both foreign and domestic. This tax on foreign property holds true even if the sale is not reported to the US. This also includes income earned from rental property, whether the property is located within the US or abroad. With a few exceptions, you will have to pay a tax on foreign property just as you would have to pay a tax on income from selling domestic property.

Tax on Foreign Exchange Gains and Losses

IRS rules for the treatment of gains and losses from the exchange of foreign currency are fairly complex. A simplified version follows though some of the more complex characteristics have been omitted.

There are two separate sections of IRS regulations that address the taxation of foreign exchange (ForEx) gains and losses: Sections 988 and 1256. ForEx trades taxed under Section 988 will be taxed at ordinary income regardless of whether the trade results in a gain or a loss. This is particularly beneficial when the trade has resulted in a loss because the loss can be used to offset other types of ordinary income. Section 988 gains and losses are reported on Line 21 of Form 1040.

However, traders also have the option to elect that their ForEx transactions to be taxed under Section 1256. This is beneficial for traders who continually profit from ForEx transactions because it allows the gains to be taxed at more favorable capital gains rates. Section 1256 allows for 60% of the gain from ForEx transactions to be taxed at long-term capital gain rates (generally 15%) and the remaining 40% to be taxed at short-term rates (ordinary tax rates).

The snag imposed by the IRS, though, is that the election must be made prior to the transaction. The form should be retained in the taxpayer’s records rather than submitted directly to the IRS. Transactions taxed under Section 1256 will be reported on Form 6781 and attached to the taxpayer’s individual income tax return.

Tax on Foreign Securities

The sale of all securities, whether foreign or domestic, is governed by the US Securities and Exchange Commission (SEC). As a result, it is often very difficult for US citizens, even nonresidents, to directly purchase stock in foreign corporations. Most US taxpayers will purchase foreign stock through their US stock broker, in which case they will be issued a 1099 at the end of each year detailing the activity resulting from the ownership.

If the US taxpayer has jumped through the hoops to allow direct ownership in a foreign corporation, the income resulting from such ownership will be treated largely in the same manner as ownership in domestic corporations. Dividends will be reported on Schedule B and taxed at their applicable rate, depending upon their classification. Sales of foreign stock will be reported on Schedule D and taxed at long-term or short-term rates, depending upon how long the stock was held. Any foreign tax credit attributable to the foreign corporation will be claimed on Passive Form 1116.

It should be noted, though, that direct ownership in a foreign corporation could likely trigger additional US reporting requirements for US citizens and Green card holders.

Tax on Foreign Property That You Rent Out

Following the theme of treating foreign income the same as domestic, foreign rental property income must also be reported and taxed like domestic properties. Activity from rental properties, foreign or domestic, should be reported on Schedule E and will be taxed at ordinary tax rates. The same types of expenses (utilities, mortgage interest, management fees, etc.) can be claimed for both domestic and foreign properties. If you have paid taxes to a foreign country on the rental income, you can claim this as a foreign tax credit via Passive Form 1116.

One small difference, however, is that foreign residential rental properties will be depreciated over the course of 40 years rather than the 27.5 years allowed for domestic properties.

When you sell a foreign residential rental property as a US citizen or green card holder, you will be required to report the resulting gain or loss on your US individual tax return. If the property was held for more than a year, the gain will be taxed at long-term capital gain rates. Likewise, if the property was held for less than a year, the resulting gain will be taxed at short-term (ordinary) tax rates. Losses will be limited to $3,000 annually, and any remaining amounts can be carried forward to future years. These rules follow the same treatment for the sale of domestic properties.

Need More Help With Tax for Expat Property Owners?

We have a post titled “Buying and Selling Real Estate Abroad” that you might find helpful. For additional information on your tax obligations on foreign properties or other questions about your US taxes, please contact us.