Reporting Foreign Rental Properties to the IRS
Owning a foreign rental property is the ultimate dream for many Americans — expat or not. But, as it turns out, buying that mountain château or coastal hacienda can come with some major tax implications — even more so if you want to make some extra cash by renting it out.
Don’t worry, though — we’re here to help you sort out your foreign property reporting requirements (both rental and otherwise) so you can get back to enjoying it. Ready to get started with this year’s reporting? No matter where in the world you are, we’ve got a tax solution for you. Get started with our made-for-expats online expat tax services today!
Buying property overseas? Learn the tax implications first.
Before you jump into the deep end of foreign homeownership (or land ownership) you should get to know your foreign property tax reporting requirements. Yes, you must report foreign properties on your U.S. tax return just like you would report any owned U.S. property.
To do that, you first need to know what type of ownership you have because it affects what tax forms you must file. Many countries have rules on who can and can’t buy land or homes, and foreign individuals are frequently in the “can’t” group. That doesn’t mean you should ditch your dreams of having the top-listed Airbnb rental, though — some countries allow you to own such properties through specific entities like corporations or trusts.
For example, in Mexico, foreigners may not own property in certain regions. To get around it, many foreigners set up what’s known as a Fideicomiso, which functions as a land trust and allows them to hold Mexican real estate.
If you set up an entity to own the property (like a corporation or trust), you may have more yearly reporting requirements depending what type of entity owns the property. These include Form 5471, FATCA Form 8938, Form 3520, and possibly Form 926. When you file with an H&R Block Expat Tax Advisor, they can walk you through other exceptions and tax implications from the different types of entities.
If you own the property outright, congratulations — you likely have fewer reporting requirements than if it was set up as a trust or corporation. In that case, you would not have to report the property on form 8938 or the other forms if owned individually.
If you inherited the property, check what type of ownership you have. You’ll have the same reporting requirements as if you bought it, and you’ll have to file Form 3520 if the property is worth more than $100,000 and the decedent was not a U.S. citizen or resident.
How to report overseas rental income to the IRS
If you rent out a foreign property you’re taxed on that rental income. To report income gains and losses, you first need to convert all currency to USD. Then you need to know how many days you either rented out your property or lived in it to figure out the tax treatment.
|Owner's Usage||Rental Usage||Tax Treatment|
|0 Days||1-365 days||Rental property|
|Less than 15 days||15+ days||Vacation home AND rental property|
|More than 14 days||15+ days||Vacation home AND secondary residence|
|15+ days||Less than 15 days||Not reportable|
While most taxation and reporting of foreign rental income is the same as it is with a U.S. rental property, there are some exceptions. If you are using a foreign property for rental income, you will be able to deduct the following on your U.S. tax return:
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Mortgage interest paid to banks and other financial institutions — they must be secured by the rental property
- Real property taxes
- Depreciation expense
- Other expenses specific to your rental — Ex: condo fees or landscaping expenses
What to do in the case of foreign rental property depreciation
“I have a non-U.S. rental property that operates at a loss. Do I still need to report it?”
Yes. Reporting foreign rental income is required even if it operates at a loss. One difference between domestic and foreign rental properties is the depreciation. Your overseas property is depreciated over a 30-year or 40-year period, depending on when it was first rented, instead of the 27.5 years for domestic residential properties.
Don't worry! An Expat Tax Advisor can help you determine how to best report your foreign rental property depreciation.
Need to report foreign rental property income? H&R Block can help.
Have more questions about reporting foreign rental income? Ready to file? We’ve got a tax solution for you — whether you want to be in the driver’s seat with our DIY online expat tax service designed for U.S. citizens abroad or want to let one of our experienced tax advisors take the wheel. Head on over to our Ways to File page to choose your journey and get started.