US Tax Implications of Foreign Real Estate

Introduction

US citizens who own foreign real estate face specific tax rules that differ from domestic property ownership. Rental income is taxable, depreciation schedules differ, and capital gains have unique considerations.

This guide covers the key US tax implications of owning property abroad.

Rental Income Reporting

Basic Rule

US citizens must report worldwide income, including foreign rental income.

• Report on Schedule E (Form 1040)
• Convert to USD using average exchange rate for year
• FEIE does NOT apply (rental income is passive, not earned)

Deductible Expenses

• Mortgage interest
• Property taxes
• Property management
• Repairs and maintenance
• Insurance
• Utilities (if you pay)
• Advertising for tenants
• Professional fees

Depreciation

• 30-year straight-line depreciation (vs. 27.5 years domestic)
• Land value excluded
• Calculate in foreign currency, convert annually

• Purchase price: €200,000
• Land value: €50,000
• Building: €150,000
• Annual depreciation: €5,000 (€150,000 ÷ 30)

Foreign Tax Credit

• Property taxes
• Income tax on rental income
• Some transfer taxes

• Required to claim Foreign Tax Credit
• Passive income category
• May carry forward unused credits

Capital Gains

When You Sell

Report capital gains on Form 1040 (Schedule D).

• Original purchase price (in USD on purchase date)
• Plus: Improvements (USD on date of improvement)
• Plus: Purchase costs (taxes, legal, commissions)
• Minus: Depreciation taken
• Equals: Adjusted basis

• Sale price (USD on sale date)
• Minus: Selling costs
• Minus: Adjusted basis
• Equals: Capital gain/loss

Currency Considerations

Exchange rate changes can create gains/losses:

• Buy for €200,000 when EUR/USD = 1.10 → $220,000 basis
• Sell for €200,000 when EUR/USD = 1.20 → $240,000 proceeds
• Currency-driven "gain" of $20,000 (no actual profit in euros)

1031 Exchange

**Does NOT Work for Foreign Property**

• Exchange US property for foreign property
• Exchange foreign property for US property
• Exchange foreign property for other foreign property

Foreign Tax on Sale

• Spain: 19% on gains for non-residents
• Portugal: 28% on gains (50% exclusion possible)
• France: 19% plus social charges
• Mexico: Up to 35% (significant deductions available)

Foreign taxes paid are generally creditable against US tax.

Reporting Requirements

FBAR (FinCEN 114)

• Foreign bank account used for property (mortgage, rental deposits)
• Aggregate balance exceeds $10,000 at any point

• Account number
• Maximum value during year
• Bank name and address

**Deadline:** April 15 (auto-extension to October 15)

Form 8938 (FATCA)

• NOT reportable on Form 8938
• Real estate is not a "specified foreign financial asset"

• Foreign mortgage is reportable
• Foreign bank account for property is reportable
• Property held through foreign entity is reportable

Form 5471/8865

• Foreign corporation → Form 5471
• Foreign partnership → Form 8865

Complex reporting; professional help recommended.

Special Situations

Primary Residence Abroad

• Section 121 exclusion ($250K single / $500K married) may apply
• Must be primary residence for 2 of last 5 years
• Gain attributable to periods after 2008 as rental may not qualify

Inherited Property

• Basis "steps up" to fair market value at death
• Must still report future income/gains
• Estate tax implications depend on total estate

Gifted Property

• Receive donor's basis (carryover basis)
• May have gift tax implications
• Form 3520 required if foreign gift over $100,000

Record Keeping

• Purchase documents (contract, closing statement)
• Improvement receipts
• Rental records
• Foreign tax payments
• Currency exchange rates used
• Bank statements

Key Takeaways

• Report all foreign rental income on Schedule E; FEIE doesn't apply
• Foreign residential property depreciates over 30 years (vs. 27.5 domestic)
• 1031 exchanges don't work for foreign property
• Foreign taxes paid may be creditable via Form 1116
• FBAR required if foreign bank account for property exceeds $10,000

Next Steps

1. Consult expat tax professional before buying foreign property
2. Set up proper record-keeping system from day one
3. Track exchange rates for all transactions
4. Understand foreign tax obligations in that country
5. Consider structure (direct vs. entity) with professional guidance