- 1 Foreign Real Estate & US Tax and Reporting Implications
- 2 Foreign Rental Income
- 3 Depreciation of Foreign Real Estate in the US
- 4 Selling Foreign Real Estate is Taxable (Capital Gains)
- 5 Foreign Real Estate & Expatriating From the US
- 6 Overseas Real Estate Gifts from a Foreign Person
- 7 Foreign Property has US Tax & Reporting Implications
- 8 About Our International Tax Law Firm
Foreign Real Estate & US Tax and Reporting Implications
5 Key Foreign Real Estate Tax & Reporting Rules in the US: It is very common for US Persons who are foreign citizens or otherwise have foreign investments to invest in foreign real estate. Many foreign countries have different rules involving foreign real estate than the United States and IRS do. For example, in some foreign countries, real estate income is not taxed until certain thresholds are met — and in other countries deductions such as depreciation are not applicable. Let’s take a look at five (5) important US tax implications of having foreign real estate:
Foreign Rental Income
When a foreign rental property generates income, that income is taxable in the United States. It does not matter if the income escapes taxation overseas. If the taxpayer already paid foreign tax on the income earned from the foreign rental property — they can typically claim a foreign tax credit using IRS Form 1116. Depending on what the tax rate is overseas, the taxpayer may have more or less foreign tax credit than necessary. If they have excess foreign tax credits, they may be able to apply the credits in future years, but if they have insufficient foreign tax credits, the taxpayer may have to pay additional US tax on the foreign income on their US tax return.
Depreciation of Foreign Real Estate in the US
Foreign structures that are used for rental purposes can be depreciated in the United States. Most foreign rental property can be depreciated using a 30-year straight line (this was updated in 2018, in which it used to be 40 years). It is important to note that when the taxpayer sells the home at a future date, the depreciation is factored into the adjusted basis calculation — and the benefits are lost. Therefore, the taxpayer must consider their ultimate goals with respect to the foreign property and their own US status in future years — before claiming depreciation.
Selling Foreign Real Estate is Taxable (Capital Gains)
When a US person sells foreign real estate, that asset is taxable as capital gain — and the same holds true for foreign rental property. Therefore, when a US person owns a foreign rental property and sells that property, the rental property must be included on the US tax return using Schedule D and applicable spot rates for currency exchange translations.
Foreign Real Estate & Expatriating From the US
When a person expatriates from the United States and is considered a covered expatriate, there may be a mark-to-market income tax consequence for the property (and other assets), collectively referred to as exit tax. There are certain exceptions and exclusions as to the amount of capital gain that an expatriate can eliminate at the time of calculating the exit tax — and step-up-basis rules for foreign real estate may apply.
Overseas Real Estate Gifts from a Foreign Person
When a US person receives a gift from a foreign person that includes foreign property, the foreign rental property value is a consideration when determining whether or not the taxpayer has met the threshold requirements of Form 3520 — which is used in part to report large gift transactions from non-US persons. Lately, the Internal Revenue Service has been on a penalty-issuing spree for US Persons who have not met the reporting requirements for Form 3520.
Foreign Property has US Tax & Reporting Implications
Even though the foreign property is located outside of the United States, US persons who own property overseas may have certain US tax and reporting requirements relating to the foreign property. Therefore, it is important to stay abreast of issues involving foreign real estate and US tax, asset reporting, and gift tax consequences.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.