How is Overseas Rental Property Income Taxed & Reported?

How is Overseas Rental Property Income Taxed & Reported?

Overseas Rental Property Income Tax

How is Overseas Rental Property Income Taxed & Reported: One of the most common types of passive investment that US Taxpayers across the globe have is rental property. For US Persons who are originally from a foreign country — or otherwise have invested globally — they may have one or more rental properties outside of the United States. When the taxpayer is a US Person, then they are required to report their rental property income to the US government. It does not matter if the rental property income does not result in a net profit; it is still reportable ot the IRS. This is also true, if the income is not repatriated to the United States and/or it is below the tax reporting requirements in the country the property is located. Let’s go through the basics of how to report foreign rental property income on a tax return:

Overseas Rental Property Income Example

Common example: Michelle is a Green Card Holder in the United States who has a foreign rental property overseas. The rental property generates $30,000 a year of gross income — and she has about $15,000 of expenses. This results in $15,000 of foreign rental property income.

Schedule E for Rental Property Income

Schedule E of the 1040 tax return is the tax form that is used to report rental property income to the Internal Revenue Service. The same IRS Form Schedule E is used, whether or not the person is reporting a US-based property or a foreign rental property. The form is relatively detailed, in that it allows the Taxpayer to claim several different types of deductions — depending on what type of expenses the taxpayer has. The first part of the form E is used to provide some background on the rental property such as which country the property is located in and the type of property that it is. Next, the taxpayer has an opportunity to take deductions based on the type of expenses, such as:

  • Commissions
  • Advertising and Marketing
  • Real Estate Tax
  • Depreciation
  • Utilities

How are Rental Property Losses Claimed? 

Generally, if the Taxpayer nets a loss across all of their foreign rental property income, then they may be able to take the loss for the year — except they are limited on applying that loss depending on what their adjusted gross income is — and what their net income tax liability is without taking the rental property loss into consideration. If the loss cannot be taken in the current year may be able to carry it forward to use against gains in future years — or when the home is sold.

Out of Overseas Tax Compliance?

If a Taxpayer is out of compliance for prior years, then depending on whether or not they also have undisclosed foreign assets, accounts or investments will determine what options they have to get into compliance. If they have additional reporting requirements then they may want to consider one of the approved offshore tax amnesty programs.

Offshore Amnesty Program Summary

The Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.

Some of the more common programs, include:

Can I Just Start Reporting This Year Instead?

No, unless the current year is the first-year you had a reporting requirement. If you had a prior year reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as a Quiet Disclosure. The IRS has warned taxpayers that if they get caught in a Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.

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