US Expat Taxes and Foreign Property: A Guide for Buying Abroad
Moving overseas is a stressful process. When you add in buying property abroad, things only get more complicated. There are a lot of factors involved in buying foreign property, such as:
- Cultural differences
- Market conditions
- Foreign mortgages
- Exchange rates
- Differing legal structure
…and, of course, taxes. This guide looks at US expat taxes on foreign property and what they mean for you.
- As a US citizen, the sale of your principal residence—regardless of where it is—will prompt a gain or loss that is reportable on your tax return.
- The rules for reporting income from selling a foreign property or rental are the same regardless of whether the property is located in the US or overseas.
Do US Citizens Have to Pay Taxes on Foreign Property?
All US citizens must file a yearly tax return regardless of where they live in the world. When filing your return, you must report your worldwide income. This includes any gain or loss from selling a foreign property and rental income.
For the most part, the rules for reporting this income are the same regardless of whether the property is located in the US or overseas. Still, there are details that Americans living abroad need to know.
Tax Implications of Buying Property Abroad
First, let’s consider the tax implications of buying property abroad. Generally speaking, you do not have to report the purchase of property—whether foreign or domestic. (One possible exception to this is if there is a Homebuyer Credit in place for that year.)
However, you will probably have to obtain a foreign bank account when buying property abroad. This will help with the following:
- Closing the sale
- Managing a foreign mortgage
- Paying foreign property taxes
You may have to file an additional US tax form in this case. US citizens with at least $10,000 in one or more foreign bank accounts must report it by filing FinCEN Form 114, better known as the Foreign Bank Account Report (FBAR).
When transferring money to your foreign bank account, be aware of the foreign exchange rates and fees associated with the transfer. When making the initial down payment on your foreign property, you could be transferring significant sums of money. Good research and enlisting the help of a professional broker could save you thousands of dollars by ensuring that you use the most beneficial foreign exchange rate possible.
Of course, when you sell the property, you will need to report the gain or loss based on the original cost. For this reason, you must keep all documentation from the original purchase and any other costs associated with buying property abroad.
Host Country Tax Requirements
Real estate transactions in foreign countries are handled differently than US transactions and may accrue estate taxes. Always research applicable laws and insurance requirements for your new host country.
Consult with the US embassy in your host country for assistance regarding local laws, property taxes, and other requirements before purchasing your new property.
Costs charged by government agencies, real estate agents, or legal advisors may be significantly more than in a US real estate transaction. These expenses vary from country to country. Researching and planning can help you save big on your US expat taxes.
Mortgage interest and points will continue to be deductible on your US expat taxes, despite the property’s location in a foreign country. However, this information needs to be reported in US dollars, so converting the amounts is essential before claiming the deduction.
For assistance in preparing your US tax return, the IRS provides annual foreign exchange conversion rates for numerous countries and links to a reputable third-party website with more detailed historical information.
Buying Property Abroad as a Corporation
In many countries, buying your property through a holding corporation rather than in your name is customary. Some types of overseas entities will make it much harder to qualify for the gain exclusion. If the host country has different options for the kind of holding corporation you can use, consult a US tax advisor before making the decision.
You may have additional US tax obligations when purchasing the property through a business entity. US citizens with non-US financial assets valued above certain thresholds must file a FATCA report. The threshold will depend on your filing status.
- If you are a resident of the US and you file as “single” or “married filing separately,” you must report all foreign assets if they exceed $50,000 at the end of the year or $75,000 at any point during the year.
- If you are a resident of the US and you file as “married filing jointly,” you must report your assets if they exceed $100,000 at the end of the year or $150,000 at any point during the year.
- If you are a resident of a foreign country and you file as “single” or “married filing separately,” you must report all foreign assets if they exceed $200,000 at the end of the year or $300,000 at any point during the year.
- If you are a resident of a foreign country and you file as “married filing jointly,” you must report your assets if they exceed $400,000 at the end of the year or $600,000 at any point during the year.
Tax Implications of Selling Property Abroad
There are distinct differences between selling a rental property and your personal residence. With rental property, you must report the sale regardless of whether you had a gain or a loss. If you sell your personal residence at a loss, you generally do not have to report this nor are you allowed to deduct the loss. But if you sell your personal residence for a profit, you are subject to tax.
However, you might be able to exclude up to $250,000 of gain from a personal residence ($500,000 if married and filing jointly). In order to qualify for this exclusion, you must have owned and lived on the property for at least two years out of the last five. This exclusion is for property located inside the US as well as foreign property. Any gain that cannot be excluded will be taxed at the more favorable capital gains tax rates.
If the gain does not qualify or is not wholly excluded, it will be considered foreign source income and thus eligible for the reduction by the Foreign Tax Credit. However, it will not be regarded as foreign-earned income and, therefore, not excludable under the Foreign Earned Income Exclusion.
To calculate the gain, both the purchase and sale must be converted to USD on the transaction date. All income must be reported in US dollars on US expat taxes. Report your gain or loss on Schedule D of your income tax return.
Effects of the Exchange Rate on Foreign Property Sales
The other important transaction likely to result from the sale of a foreign residence is the gain or loss resulting from the foreign exchange rate conversion when the mortgage is paid off. The currency exchange gain or loss resulting from the payoff of the mortgage is considered personal. Thus, any resulting loss is not deductible.
However, any resulting gain is taxable at ordinary income rates. If you have held the property for more than a year, you will qualify for the lower long-term capital gain tax rates. Unfortunately, you cannot use the loss on the sale of the home to offset any currency exchange rate gain and vice versa.
Selling Real Estate Abroad: Calculating US Capital Gains Tax
To help explain how to calculate the capital gains tax associated with selling your foreign real estate, let’s discuss the sale of John Expat’s primary residence outside the US.
John moved to China in 2005, where he immediately began searching for a home to purchase. He found one, and on November 17, 2005, he signed the papers to buy his new home. He paid 1,865,000 Chinese Yuan (CNY) for the property on the date of sale. On May 25, 2007, he spent 50,000 CNY for new windows on the house.
In 2011, he decided he wanted to move back to the US to spend time with his family and put his house on the market. He signed the closing papers on June 24, 2011, with a sales price of 2,010,000 CNY. At that time, he had 1,725,000 CNY left to pay on his mortgage.
Each transaction is converted to USD at the date the transaction occurred:
|Original Purchase Price||1,865,000||11/17/2005||0.1237||230,701|
|Gain on Sale of Property||95,000||72,918|
Because John owned and lived in the property for at least two of the last five years, he is eligible to exclude the entire gain associated with the sale of his principal residence.
The other transaction that results from the sale of his principal residence is the gain or loss resulting from the currency exchange. This is calculated as follows:
1. Mortgage Purchase Calculation
|Remaining Mortgage (CNY)||1,725,000|
|Purchase Date Exchange Rate||0.1237|
|Mortgage Purchase (USD)||212,383|
2. Mortgage Payoff Calculation
|Remaining Mortgage (CNY)||1,725,000|
|Sale Date Exchange Rate||0.1543|
|Mortgage Payoff (USD)||266,168|
3. Gain/Loss Calculation
|Gain/(Loss) on Payoff (USD)||(52,785)|
It will take more USD to pay off the foreign mortgage than initially anticipated at the date of purchase. The result is a net loss of $52,785. Unfortunately, this loss is not deductible on John’s US expat taxes.
The total impact on John’s US expat taxes resulting from the sale of his principal Chinese residence is zero. He can exclude all gains associated with the sale of the property, and he incurred a loss on the currency exchange associated with the mortgage payoff, which cannot be applied to his other foreign income.
Reporting Rental Income on Foreign Real Estate
If you receive any rental income from a foreign property, you will also have to report that on your income tax return. You can apply the same tax deductions to rental income from a foreign property as a property in the US. These deductions include:
- Mortgage interest
- Management expenses
- Local property taxes
As with any other foreign income or gain, you must report it as US currency. This will generally require a conversion process.
When selling a rental property, the taxes will likely be more complex than when selling a home or other personal property. For example, the tax you owe on any gain may be impacted by the following:
- Your overall gain
- The length of the holding period
- The depreciation of the property
The only notable exception is deprecation, which is calculated differently for property located outside of the US.
If you don’t own the rental property outright (as is somewhat familiar for foreign rental properties), your tax filing requirements may become even more complicated. In this case, you will likely have to file Form 5471.
If you don’t own the rental property in your name but instead owe it through a company you set up outside the US, your tax filing requirements may become even more complicated. In this case, you will likely have to file Form 5471, 8865, or 8858.
Questions About Owning Property Abroad?
If you are buying a residence overseas, you should discuss your options with your host country’s US embassy, consult multiple international real estate brokers, and discuss your options with an expat tax expert like Greenback. Contact us, and one of our customer champions will be happy to help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.