Last Updated on September 18, 2024 by Kristina Valcheva
US owners of international rental property often benefit from lucrative rental income streams. But, do you have to declare overseas property? The answer is yes, and understanding the foreign rental income tax implications is important.
A survey by Coldwell Banker revealed that 92% of high-net-worth Americans were actively considering international real estate investments last year.
While acquiring that dream alpine estate or seaside villa is exciting, it also comes with significant tax obligations, especially if you plan to generate income through rentals.
Don’t worry—we’re here to help you navigate the complexities of overseas rental income tax reporting, so you can enjoy your investment without the hassle.
Do you have to declare foreign rental income on your US tax return?
Yes. Understanding the rental income tax rules is essential for accurate reporting.
If you own properties, whether they’re in the US or abroad, and you’re using them for business purposes, you need to declare foreign property on your US tax return.
One of the most popular misconceptions among Americans is that they are exempt from paying taxes on international rental income.
In fact, very few countries tax income earned overseas, and this leads to many US citizens assuming that the same rules apply to them.
This requirement applies even if you have already reported the property on your tax return in the country where you reside.
How to report overseas rental income on your tax return
Filing for rental income tax can be complex, so it’s important to gather all relevant financial records and documentation.
In general, the IRS requires you to report non-US rental income similarly to how you would report income from rentals in the US, using Form 1040, Schedule E.
On this form, you’ll also detail rental expenses and losses, such as maintenance costs, property taxes, and management fees.
To report your income gains and losses, start by converting all the currency to USD. Then, figure out how many days you rented out the property or lived in it to determine the correct tax treatment.
So, if you own a foreign vacation or second home that you rent out, you’ll need to report the income from this property if it meets the threshold requirements listed in the chart below:
| Owner’s Usage | Time Rented Out | Tax Classification |
| No personal use | 0-365 Days | Classified as a regular rental property |
| 15 or more days of personal use | Rented out for fewer than 15 days | Not required to report on US income tax return |
| Less than 15 days of personal use or 10% of days rented | Rented out for 15+ days | Considered both a vacation home and rental property |
| More than 14 days of personal use or 10% of days rented | Rented out for 15+ days | Considered both a vacation home and secondary residence |
The process for reporting overseas rental income is mostly the same as for US rental properties.
However, there are only a few differences, including the foreign tax credits available to expat property owners and the modifications to depreciation rules.
To report your rental income, first identify how you own the property. If you own it directly or through a single-member LLC (which the IRS treats as a disregarded entity), you need to report income and expenses on Schedule E of your US tax return.
If the property is owned through a multi-member LLC, a foreign corporation, partnership, or trust, you will have additional reporting requirements, possibly including Forms 1120, 1065, 5471, 8865, or 1041.
What expenses can I deduct to reduce my foreign rental income tax?
To report overseas rental income correctly, you need to keep detailed records.
This includes rental agreements, income receipts, and any property-related expenses. Good record-keeping helps prevent mistakes and issues during audits.
If you have to declare rental income, you can deduct the following expenses on your US tax return:
- Auto and travel expenses
- Advertising costs
- Cleaning and maintenance services
- Management fee expenses
- Legal and professional fees
- Foreign mortgage interest on loans from banks or financial institutions, provided they are secured by the rental property
- Insurance premiums
- Repair costs
- Utility bills
- Depreciation
- Other rental-specific expenses, such as condo fees or landscaping costs
There is no longer an option to deduct foreign property taxes.
Got questions? You can request a no-obligation from a tax advisor.
Do I have to declare foreign rental property and report it if it operates at a loss?
Yes, you must report overseas rental income even if the property operates at a loss.
Are there any other reporting requirements for overseas property?
If you open a foreign bank account to manage income and expenses for your foreign rental property, you might need to file an FBAR. The FBAR rules require all US citizens to report if they have $10,000 or more in one or more foreign accounts.
Moreover, if your foreign rental property is held through a foreign entity like a corporation, partnership, or trust, you might also need to file a FATCA report (Form 8938), Form 5471, Form 8865, or Forms 3520 and 3520A.
These forms are detailed and come with penalties that start at $10,000.
*Note – Our tax advisors do not assist with these tax forms. We can help you file your rental income tax return in the US and in the country where your property is located, if the real estate is in France, Spain, Ireland, UK, Germany, Poland, Hungary and US.
Got questions? You can request a no-obligation from a tax advisor.
What are the rules for foreign rental property depreciation?
When you own rental property abroad, depreciation works differently than for domestic properties.
Depreciation is a method used to spread out the cost of a property over its useful life to reflect its decreasing value.
This allows you to deduct a portion of the property’s cost each year to account for wear and tear.
For example, if a domestic rental property costs $300,000, you would divide this amount by the IRS’s 27.5-year lifespan for residential real estate, resulting in an annual depreciation deduction of about $10,909.
This deduction reduces your taxable overseas rental income and, consequently, your tax liability.
However, foreign rental properties follow different rules.
According to IRC Section 168(g)(1)(A), tangible property used primarily outside the US must use the Alternative Depreciation System, which specifies a 30-year lifespan instead of the 27.5 years used for domestic properties.
So, if you have a foreign rental property valued at $300,000, you would calculate depreciation by dividing the property’s value by the 30-year period under this system. This gives you an annual depreciation expense of $10,000, which you can deduct on your tax return.
What are the reporting responsibilities of overseas rental income for joint ownership?
When a foreign rental property is jointly owned, it’s crucial for co-owners to clearly communicate their reporting responsibilities.
Each person needs to understand their duty to report their portion of the income. Effective coordination is important to make sure the income is correctly divided and reported.
What are the penalties for not reporting this rental income?
Not reporting overseas rental income can have serious consequences.
You might face large fines, interest on any unpaid taxes, and possibly legal trouble. The IRS has advanced tools to spot mistakes, so it’s important to be accurate.
Do I have to file an income tax return also in the country where the property is located?
Yes.
You should also know that reporting overseas rental income to the IRS might mean you need to follow the tax rules of the country where the property is.
This could include filing rental income tax returns or reports with the foreign tax authority. It’s important to make sure you follow both US and foreign tax laws.
What is the Foreign Tax Credit?
The Foreign Tax Credit (FTC) is a benefit for US citizens and resident aliens that helps lower their US taxes by allowing them to offset taxes paid to other countries.
When dealing with foreign rental income, the Foreign Tax Credit (FTC) helps avoid paying tax twice on the same income.
This credit lets you reduce your US tax bill by the amount you paid in taxes to the foreign country where you earned the income.
The FTC helps lower your total tax bill, protecting you from losing money due to double taxation.
Be sure to keep receipts and documents showing your foreign tax payments, especially if you have several foreign rental properties. Accurate record-keeping is key.
If your FTC is more than your US tax bill, you can either apply the extra credit to last year’s taxes or carry it over to future years.
This flexibility can help you manage your taxes better. However, the FTC can only be used to offset US taxes on your overseas rental income and not on other income.
This prevents double taxation on the same income earned abroad.
Can you use the Foreign Tax Credit for overseas rental income?
Yes, usually you can.
If you rent out property overseas, you’ll often pay taxes on that income in the foreign country, and you’ll also owe taxes on the same income in the US.
Fortunately, you can use the Foreign Tax Credit to reduce your US taxes by the amount you paid abroad.
For example, if you paid $100 in foreign income tax, you can generally deduct that $100 from your US tax bill.
Who can use the Foreign Tax Credit?
Here’s who can qualify for the FTC and what’s needed:
- US Citizens and Residents: US citizens, resident aliens, and green card holders can use the FTC.This includes taxes paid on both earned income (like wages) and unearned income (like dividends or interest). Nonresident aliens cannot use the FTC.
- Foreign Income Source: The taxes must be on income from foreign sources, such as earnings from working abroad or foreign investments. Income from US sources, even if you’re living overseas, does not qualify.
- Legal Obligation: The taxes must be legally required by the foreign country, not voluntary. They should be based on the foreign country’s tax laws.
- Tax Treaties: Check if there is a tax treaty between the US and the foreign country. Tax treaties can affect your eligibility for the FTC and how it is calculated. Review the specific treaty details for accurate information.
Tax treaties are agreements between countries to avoid taxing the same income twice. They decide how income earned in one country by a resident of another country will be taxed.
For property owners, these treaties can be very helpful. They usually set rules about which country can tax certain types of income, including rental income from abroad.
Tax treaties often offer ways to get relief from double taxation, such as tax credits, exemptions, or deductions.
It’s important to know the details of the tax treaty between the US and the country where your rental property is located to make the most of these benefits.
What is Form 1116?
Form 1116 is used to calculate and claim the foreign tax credit. It is an essential form for determining your eligibility for the credit and making sure it’s calculated correctly.
Understanding QBID and its impact on global rental income tax
The QBID (Qualified Business Income Deduction) lets eligible taxpayers deduct up to 20% of their qualified business income from their taxable income.
This helps small businesses and certain types of investments, like real estate in partnerships or LLCs, by giving them a tax break.
If you own foreign rental property through a pass-through entity, the QBID can make your taxes more efficient. It might allow you to exclude part of your overseas rental income from your taxable income, reducing your overall tax.
Eligibility and limits for QBID
To qualify for QBID, several factors matter, such as the type of business and your total taxable income. For rental properties, the QBID applies if the property is run as a business and you actively manage it.
However, there are limits, and calculating the QBID can be complex. High-income individuals or those in specific professions like law or healthcare may face additional rules.
It’s a good idea to consult a tax professional who understands international real estate taxes to ensure you comply with all regulations.
Maximizing QBID benefits for overseas rental income
To make the most of the QBID for rental income, careful planning and understanding of tax rules are necessary. This might involve setting up the property under a pass-through entity or meeting the criteria for the deduction.
Keeping detailed records of rental expenses and activities is crucial for claiming the QBID. Proper documentation helps comply with IRS rules and maximizes your deduction benefits.
Who can help me with reporting overseas rental income tax?
You should now have a clearer idea of the tax effects related to your overseas rental property. If you have any more questions, we’re here to help.
We can even handle the preparation and filing of your income tax return for you.
Property Tax International (PTI Returns) helps numerous American property investors, whether they’re dealing with real estate in the US or overseas, by taking care of their tax filings.
If you’re unsure about reporting requirements for your overseas rental property or interested in understanding eligible tax benefits for US expats, we’re here to support you.
We’ve got you covered If you’re seeking an experienced tax professional to review and approve your tax return.
Property Tax International‘s tax advisors can help you by taking the hassle out of the tax paperwork.
Our team is equipped to assist individuals who are either US citizens or green card holders, regardless of the location of your property.
We do not deal with tax returns for properties owned and managed by businesses, whether they’re US-based or foreign.
Got questions? You can request a no-obligation from a tax advisor.