If you are planning a move abroad, maybe for work or just for a lifestyle change, you may be wondering what you’ll do with your US residence – and what the tax consequences of your decision will be. It’s important to fully understand your requirements, so there will be no surprises come tax season. Here are a few US expat tax return facts to consider if you think you’ll want to keep your US home while living abroad.
Maintaining a US Home While Abroad
If you’re in the planning stages of moving abroad and aren’t sure how your US expat tax return will be affected by keeping your home in the US, there are a few things to consider. Simply maintaining your US home is not the same as renting it out, as you’ll see below.
The Effects of a Vacant Home
Perhaps you intend to keep your home in the US, but don’t want the additional responsibility of renting it out. Generally speaking, in this scenario, you’ll have no additional tax responsibility. It does depend on how you intend to qualify for the Foreign Earned Income Exclusion (FEIE), though. If you use the Physical Presence Test, there will likely be no impact on your US Tax Return.
If you use the Bona Fide Residence Test, however, you might need to state a reason for retaining your US property if you are living full-time in a foreign country with no intention of returning back to the US. This is because the key factor in using the Bona Fide Residence Test is that the IRS only considers you a bona fide resident if you don’t plan to return to the US – and maintaining a residence there might be viewed as an expectation of returning at some point.
Renting Out Your US Home and Your US Expat Tax Return
Choosing to rent out your US home can be a nice way to recoup the costs of maintaining the home while you’re abroad, but doing so does not come without its challenges related to your US expat tax return. The effects of renting also depend on how many days out of the year your home is rented.
- If you spend no time in the home during the tax year and it is entirely considered a rental property, 100% of the rental income must be reported on your US expat tax return and all expenses and repairs will be deductible.
- If your US home is rented out more than fifteen days in the year and you spent fourteen or less days there in the year, your home will be classified as a vacation home and rental property by the IRS. Your indirect expenses (i.e., mortgage interest, real estate taxes, depreciation, etc.) will be pro-rated based on the number of days the home was rented out. Things like direct management expenses, management fees, advertising and the like will be 100% deductible against the rental income.
- If you spend more than fourteen days in your US home, and it was also rented out more than fifteen days in the tax year, it’s considered a vacation home and a secondary property. In this instance, you must report rental income and then the deductible expenses will be prorated based on the number of days the property is rented out.
- If you spend more than fifteen days in your US home but rent it out fewer than fifteen days, you don’t need to report any rental income you receive. So, for example, if your home rents out for one week per year, most likely, you won’t need to report that income on your US expat tax return.
The four situations above are the general consensus for handling expat taxes for your US residence, but it’s a good idea to consult with an expat tax professional regarding your individual tax situation. To learn more about the ins and outs of filing expat taxes, download a US expat tax guide for details.
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