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Own and Rent Property Abroad? – U.S. IRS Tax Rules You Must Follow

U.S. IRS Tax Rules You Must Follow

When you are renting out your real property in a foreign country, as a US Citizen or permanent resident, you must not only comply with all tax requirements of that foreign country, but you must also report all rental information on your US income tax return. The rules are almost the same as those for rental property located in the US, but with some variations.

  • If you own the Mexican rental in your individual name, you report all of your rental income and expenses on Schedule E of your Form 1040.  All of the allowable expenses are the same as for US property.
  • Expenses you can deduct include management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance, depreciation, and other miscellaneous expenses.
  • Unlike property located in the US, you must depreciate the property (amount allocatable to the structure) over a 40 year period rather than shorter times sometimes allowed for US property.
  • You can take a credit against your US federal income tax for income taxes paid to the foreign country on your net rental income after deducting all expenses.  That credit is limited to the amount of US Federal tax you paid on that rental income on your tax return.  Any unused foreign tax credit can be carried over to future year.  Most US states do not allow any credit for income taxes paid foreign countries.
  • Any Value Added Tax (VAT) or occupancy tax collected from the renter should be included in your rental income, but then you can deduct out those  taxes so you do not have to pay any tax on those items.
  • The same restrictions and limited allowable deductions for “vacation homes” apply when you have occupied the property yourself part of the time and rented it out to third parties at other times.
  • When the property is sold (if it is held in your individual name ) your  net gain is taxed in the US at the applicable lower capital gains rates, and you can claim a credit against your US tax on the sale for the foreign capital gains or income  taxes paid on that profit to Mexico.

If the property was used for the 2 years during the previous 5 years prior to sale as your personal primary residence (you must actually live in it full time during that period), you may be able to exclude up to $500,000 of the gain from your US income taxes under the exclusion allowed for sales of personal residences. If the property was rented out part of that time, some of the gain on sale will be subject to US income tax.

If your foreign real property is held through a foreign corporation, there can be adverse US tax consequences while renting out the property and upon sale on your US tax return.  With the proper type of foreign corporation, certain elections can be made with the IRS  which will negate almost of these US tax problems.  These elections are only made for US tax purposes and do not in any way affect the way your foreign corporation is taxed under the tax laws of its country of location.

Other  US Tax Forms That May be Required:

Form 8865: If you own your  foreign rental  in a foreign partnership (if you own 10% or more) or LLC you must filed this form  each year with your personal tax return to report the details of its income, expenses, etc.

Forms 3520/3520A: If you own your foreign rental property or personal residence in a foreign trust, you must file both of these forms each year.  They are not filed with your personal tax return. One form is due 3/15 after the end of the calendar year and the other is due on the extended due date of your personal tax return. Failure to file these forms can result in extreme penalties.

Form 5471: If your foreign real estate is held in a foreign corporation, you must file this form each year if you own 10% or more of the shares (actually or constructively) in the corporation. This form is due on the extended due date of your personal return. The IRS can impose a $10,000 per year penalty for filing this form late or not at all.

Form TDF 90-22.1: This form reports your ownership in foreign bank and other financial accounts. It would include any accounts where your property manager or accountant is using to collect rents or pay foreign taxes and rentals. If the highest total of all of your foreign financial and bank accounts when combined together equal or exceed at any time $10,000 US per year, you must file this form to report details of all accounts.  It is filed separately from your tax return and is due on June 30th following the end of each calendar year. The due date cannot be extended. The IRS can impose a $10,000 penalty for filing the form late or not at all.

About the author: Don D. Nelson is a US Attorney and CPA who has specialized in helping Americans living and working in foreign countries with their US Tax planning and compliance for the last 20 years.

  • Foreign Offshore & US Tax Planning
  • US Tax Return Preparation (including all US states)
  • Foreign Trust US Tax Form Preparation
  • Foreign  Corporation  & Foreign Partnership US Return Preparation
  • Foreign Bank  & Financial Account Reporting (FBAR) Form Preparation
  • Expatriate and International Tax Forms Prepared
  • Consultation on US tax aspects of owning property and operating a businesses in any country in the world

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17 Comments

  1. AC March 28, 2011 at 5:58 pm

    Screw all that. I don’t understand why I have five hundred forms to fill out detailing every impossible detail of some foreign, low-rent rat hole while GE can make $26 billion in pure profit and not pay a penny.

  2. Dave Starr March 29, 2011 at 6:22 am

    Excellent primer, Don. The IRS instructions and tax code in general often seem pretty obtuse when it comes to US citizens who live overseas. This article helps clarify several isues in my mind.

    One quick question is, why your first bullet point is there reference to a Mexican rental prperty? Are there special US rules involving rental property in Mexico, or may we assume the tax code treats rentals in all countries the same?

  3. ed whittle July 22, 2011 at 2:14 pm

    Hi Don

    I am a US citizen living in Florida. What would my tax liability be on a condo in Athens, Greece, that was given to me in a living trust and then I sold it for $200,000. Would the entire $200,000 be a capital gain in the US and
    would there be any ways to reduce my taxes on it?

    Any help would be greatly appreciated.

    Thanks,

    Ed

  4. john petrino July 27, 2011 at 12:04 pm

    what a farce.The IRS is a zionist collection agency,meant to punish americans who chose to leave that hellhole of a society.Sell your house,get another citizenship,buy a house in let us say germany.Do not report anything to any US agency,live a happy life and forget about the IRS.The day will never come where the IRS can confiscate your house in germany.

  5. Adam August 1, 2011 at 1:54 pm

    Hi.

    If an American owns a house, lets say in Scandinavia is he obliged to report this to IRS and does he need pay some tax for it? The house will soon be inherited.

    best regards

  6. Ocho August 30, 2011 at 3:06 am

    Quick question here. What if I manage property rental overseas and it’s not under my name? Would I be taxed too?

  7. Eve September 8, 2011 at 3:33 pm

    I’d like to know the answer to Adam’s question from 8/1/11 as well. Does anyone know if you have to report this property even if you are not earning rental income off it?

    • Tyler September 30, 2011 at 9:56 pm

      Eve, if you are using the property as your personal residence then there would be no income and no need to report anything on your tax return. You may be able to deduct mortgage interest and property taxes on Schedule A of your tax return. Also, you would be entitled to the $250,000 exclusion from capital gains when you sold the property.

      Ocho, if you manage the property without an ownership interest only the income that you receive for your services would be reportable.

      • Don Oellrich, CPA February 26, 2012 at 8:51 pm

        Tyler, you are correct as it relates to filing returns for periods ending as late as 12/31/10. Check the IRS website for Form 8938 which is included with your 2011 tax return. Fiscal year requirements may be slightly different, but essentially you must now report the existence of foreign assets, including personal use property such as a residence.

  8. Teddicus December 18, 2011 at 1:22 am

    If I start a corporation overseas with money I have already paid taxes on…. and the corporation is profitable but all profits are held within the corporation. Do I need to pay taxes on the asset that is my ownership/shares of the foreign corporation?

  9. Vico January 11, 2012 at 1:43 pm

    This is about a real estate property in Mexico I want to sell. How to determine the purchase price and sales price for capital gain/loss determination in US dollars?

    I have read in some blogs that to determine the original purchase price and the selling price one must use the exchange rate on date of each event. So if the prioperty was purchased on Oct 2004 at $ n mexican pesos and the exchange rate was 11.42, then use that rate to calucalte your purchase price. If the property was sold in Sept 2011 at $ n2 mexican pesos and the exchange rate was 14.06, thet use that to calcualte the sales price.

    Is this correct????

  10. nora March 11, 2012 at 7:09 pm

    Hi,
    i have owned an apartment in France for 14 years, its been my principal residence . however, a few years ago i began living with a friend in CA for part of the year, winters, and declaring my irs and other addresses in CA. Now i want to sell my french property and buy a property of my own in CA. As i divide my time about equally with france, as i am an artist and on social security and not much other income, what shall i do? do i have to pay capital gains on what i earn on my apartment? thanks, nora

  11. Property Tax Reduction Services March 24, 2012 at 12:44 am

    Such a great information about US IRS Tax rules. Thanks for sharing this information.

  12. Aruba July 20, 2012 at 3:09 pm

    It’s actually a cool and helpful piece of info. I am glad that you just shared this useful info with us. Please keep us up to date like this. Thanks for sharing.

  13. Andrew Floudiotis April 5, 2013 at 9:32 am

    WE file our taxes in usa as us citizens and planning to buy propert in Greece. I know closing costs regarding taxes , notary, lawyer etc. etc are high and would like to know if we are allowed to deduct all or partial of those costs when we file our taxes. Your answer would be greatly appreciated.
    Thank you

  14. frankie April 26, 2013 at 2:16 pm

    Have you or your friends ever borrowed money from the loan sharks? And the rules for paying back? American government is the loan shark! DON’T trust the government. My father tried to be a good citizen and do the right thing to let them know the oversea property and the rent. But what it comes down to is that once they know, they will suck you dry and then some! They would penalize not for the amount of rent my father received as income over the years but what the government estimate the worth of rent to be based on the value of the property in street value which government of course would praised it to be much higher. Once the government know, they will take everything you have!! Forget this crap citizenship. It is not worth the hassle. Don’t believe the rules to follow, it is an attempt to find out what you have then they dissect you!

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