US Taxes on Foreign Property: Buying & Selling Real Estate Abroad
- Do US Citizens Pay Taxes on Foreign Property?
- Tax Implications of Buying Property Abroad
- Tax Implications of Selling Property Abroad
- Foreign Tax Considerations
- Foreign Property & Rental Income: US Tax Rules
- Reporting Foreign Property & Compliance Requirements
- Still Have Questions about Buying or Selling Property Abroad?
Buying or selling property overseas can complicate your tax requirements. In this guide, we’re looking at US expat taxes on foreign property and what they mean for you. Here’s what you need to know about buying and selling a house abroad.
Key Takeaways
- Buying property overseas doesn’t automatically trigger a US tax reporting requirement.
- Selling foreign property will result in a capital gain or loss that is reportable on your US tax return.
- Buying or selling foreign property may create tax obligations in your country of residence.
Do US Citizens Pay Taxes on Foreign Property?
As an American living abroad, you are not required to report the mere purchase or ownership of foreign property on your US tax return. However, there are several circumstances related to foreign property that do trigger US tax reporting and potential tax liability:
- Earning rental income from foreign property must be reported on your US tax return
- Selling property for a gain, triggers capital gains tax reporting requirements
- Owning property through a foreign trust or entity may activate FATCA reporting rules (more on this below) and require additional forms to be filed annually.
For example, if you’re a US expat living in Spain who earns $18,000 in rental income from a property there and pays $3,000 in Spanish taxes, you must report this income on your US return. However, you may be able to offset your US tax liability using the Foreign Tax Credit.
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Tax Implications of Buying Property Abroad
First, let’s consider the tax implications of buying property abroad.
Do You Need to Report Foreign Property Purchases?
When you purchase property overseas, the transaction itself does not trigger automatic US tax reporting. However, related financial activities might require reporting.
- FBAR (Foreign Bank Account Report): If you open a foreign bank account to purchase the property or manage rental income, and the total of all your foreign accounts exceeds $10,000 at any time during the year, you must file an FBAR (FinCEN Form 114).
- FATCA (Foreign Account Tax Compliance Act): If you own the property through a foreign corporation, trust, or other entity, you may need to file Form 8938 if your foreign financial assets exceed certain thresholds. These thresholds depend on your filing status and where you live. When living outside the US, the general amount is $200,000 for single expats and $400,000 for married couples filing jointly. If living in the US, $50,000 for single expats, and $100,000 for married couples filing jointly. Other thresholds may apply.
Note that foreign real estate is not a reportable asset under FATCA or FBAR requirements, but the financial accounts used to purchase or collect income from the property may be.
Mortgage Interest Deductions for Foreign Property
US taxpayers can deduct mortgage interest on foreign property if it qualifies as a primary or secondary residence, subject to the same limitations as domestic properties:
- Interest is deductible on up to $750,000 of mortgage debt ($375,000 if married filing separately) through 2025
- Property must qualify as your primary residence or a second home
- Interest must be paid to a legitimate lender
For example, if you purchase a home in France with a $300,000 mortgage and use it as your primary residence, you may be able to deduct the interest payments on your US tax return.
Tax Implications of Selling Property Abroad
When you sell foreign property, you must report any gain or loss on your US tax return. The IRS treats this transaction similarly to selling domestic property, but with a few added complexities.
Calculating Your Basis and Sale Price
Your first challenge when selling foreign property is determining the correct amounts in US dollars:
- Purchase price (Basis): You must convert the original purchase price from the foreign currency to US dollars using the exchange rate on the date you purchased the property. This becomes your cost, or in tax terms, your basis.
- Improvement costs: Any substantial improvements you made to the property (like renovations or additions) increase your basis. These expenditures must also be converted to US dollars using the exchange rate at the time you paid for the improvements.
- Sale price: When you sell, you’ll convert the sale price to US dollars using the exchange rate on the date of sale.
The difference between your adjusted basis (purchase price plus improvements) and the sale price determines whether you have a capital gain or loss. Fluctuations in exchange rates can have a significant impact.
Capital Gains Tax Rates
How much tax you’ll pay on your gain depends on how long you owned the property:
- Short-term capital gains (property held for one year or less) are taxed at your ordinary income tax rates, which currently range from 10% to 37%, depending on your total income.
- Long-term capital gains (property held for at least one year plus one day) qualify for preferential tax rates, which can generally be thought of as follows:
- 0% for those in the 10% or 12% ordinary income tax brackets
- 15% for most middle and upper-middle-income taxpayers
- 20% for high-income taxpayers (in the 37% ordinary income tax bracket)
Additionally, higher-income taxpayers may be subject to the 3.8% Net Investment Income Tax (NIIT) on their capital gains.
Primary Residence Exclusion: A Major Tax Break
One of homeowners’ most valuable tax benefits is the Section 121 principal residence exclusion. Under this provision:
Single taxpayers can exclude up to $250,000 of capital gains from the sale of their primary residence. Married couples filing jointly can exclude up to $500,000
To qualify for this exclusion, you must meet the following requirements:
- You must have owned the home for at least two years out of the five-year period ending on the date of sale.
- You must have used the home as your principal residence for at least two years out of that same five-year period. This 24-month (about 2 years) period does not have to be consecutive days.
- You can’t have claimed another Section 121 exclusion within the past two years.
This exclusion applies to foreign properties just as it does to US properties, making it a powerful tax-saving tool for Americans living abroad who sell their foreign primary residence.
Foreign Tax Considerations
When selling property abroad, you’ll likely pay capital gains tax to the foreign country where the property is located. You can use the Foreign Tax Credit to offset your US tax liability to avoid double taxation. Here’s how it works:
- You pay tax to the foreign country on your capital gain
- You report the capital gain on your US tax return
- You claim a credit for the foreign taxes paid against your US tax liability
This system ensures you don’t pay tax twice on the same gain, though the mechanics can be complex if the countries calculate gains differently or have different tax rates.
Foreign Property & Rental Income: US Tax Rules
Rental income from foreign property is subject to US taxation and must be reported on Schedule E (Form 1040). The good news is that you can deduct expenses associated with your rental property:
- Property taxes paid to a foreign government
- Mortgage interest
- Depreciation (using a 30-year schedule for foreign residential property)
- Maintenance and repair costs
- Property management fees
- Insurance premiums
- Other expenses that are related directly to your rental property activities
If you use the property yourself in addition to renting it out, different rules apply depending on how many days you use it personally versus how many days it’s rented.
Reporting Foreign Property & Compliance Requirements
| Form | Purpose | Who Must File | Thresholds/Triggers |
| FBAR (FinCEN Form 114) | Report foreign financial accounts | US persons with foreign financial accounts | The total of all foreign accounts exceeds $10,000 at any time during the year |
| FATCA (Form 8938) | Report specified foreign assets | US taxpayers with substantial foreign assets | >$200K (single) living overseas, >$400K (married) living overseas If in the US, these amounts are one quarter of the amounts listed above |
| Schedule E (Form 1040) | Report rental income and expenses | Anyone earning rental income from foreign property | Any amount of rental income |
| Schedule D (Form 1040) | Report capital gains/losses | Anyone selling foreign property | Any sale resulting in a gain or loss |
| Form 4797 | Report business property sales | Anyone selling foreign rental property | Required for property used for business/rental purposes |
Still Have Questions about Buying or Selling 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.
At Greenback Expat Tax Services, we provide tax support for Americans living around the world. Contact us, and one of our customer champions will be happy to help. You can also click below to get a consultation with one of our expat tax experts.
