Last Updated on September 16, 2024 by Kristina Valcheva
Understanding how to manage overseas property and claim foreign property tax deductions can make a big difference in minimizing your rental income tax and optimizing your returns from international property investments.
Navigating international real estate comes with its own set of complexities, particularly with varying tax laws.
However, as you begin earning from your overseas rental property, important questions arise: How does foreign real estate tax impact you, and are you eligible to claim a foreign property tax deduction?
Here, we’ll address your questions and guide you in optimizing your international property investments, ensuring you achieve both financial gains as well as peace of mind.
In this article:
- Understanding tax benefits for foreign real estate vs US property
- Property for personal use
- Capital Gains on selling a foreign property
- 1031 Exchanges
- Can I deduct mortgage interest on my foreign property?
- Can I deduct foreign property taxes?
- Is foreign property depreciable?
- Foreign rental property. When does a house qualify as a regular rental property?
- How does the US tax global income, particularly in relation to foreign real estate tax obligations?
- Do I need to declare an overseas property on my US tax return?
- Tax reporting for overseas rental income
- Can double taxation treaties help me pay less tax?
- What are the rules for foreign rental property depreciation?
- What foreign property tax deductions can I claim?
- Can American expats receive tax exemptions for an overseas rental property?
- I am renting out a foreign property. Who can help me manage my foreign real estate tax in the US and abroad?
- Why choose Property Tax International over a local accountant?
Understanding tax benefits for foreign real estate vs US property
Owning foreign real estate can offer similar tax benefits to owning property in the US, with a few key differences.
Key Points:
- Tax rules for homes are mostly the same whether they’re in the US or abroad.
- You can usually deduct mortgage interest and points on up to $750,000 of mortgage debt ($375,000 if married filing separately).
- To claim these deductions, you must itemize them on Schedule A of your tax return.
- How you use the property affects the rules for rental income.
- Foreign property taxes can no longer be deducted on your US tax return, a change made in 2017.
Specifics:
- If you live in the home, you can generally claim mortgage interest and points as deductions.
- If you rent out the property, you can deduct expenses like mortgage interest, insurance, repairs, and travel related to managing the property.
Property for personal use
If you use your property as a second home and not for rental, you can deduct mortgage interest and discount points just like with a second home in the US.
For 2024, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately) for both your primary and second homes combined.
If you bought your properties before December 16, 2017, you can deduct interest on up to $1 million of mortgage debt.
These limits apply through 2025, after which the cap is expected to increase to $1 million ($500,000 for separate filers), unless Congress changes it.
Keep in mind that, like with a primary residence, you cannot deduct expenses like utilities, maintenance, or insurance unless you qualify for a home office deduction.
Also, note that foreign property taxes are not deductible for tax years 2018 through 2025.
Capital Gains on selling a foreign home
Selling property overseas is taxed in a similar way to selling one in the US. If you lived in and owned the property for at least two out of the last five years, it counts as your main home. This lets you exclude up to $250,000 of the profit from taxes, or $500,000 if you’re married.
If you make more profit than that, the extra amount is taxed based on how long you owned the property—either at a short-term or long-term capital gains rate. But if you’ve already used this tax break for another home sale in the last two years, you can’t use it again.
To qualify for this tax break, you must have owned and lived in the home for at least two years during the five years before you sold it. These two years don’t have to be in a row, but they must fall within the same five-year period.
If the property wasn’t your main home, you’ll have to pay capital gains tax on the entire profit. Since the profit is considered foreign income, you can get a foreign tax credit, but it doesn’t count as foreign earned income, so you can’t exclude it from your US taxes
1031 Exchanges
If you sell an overseas property, you might be able to use a 1031 exchange to trade it for another similar property without paying taxes right away. This allows you to avoid paying capital gains taxes.
But, you can only do this with other foreign properties. You can’t use a 1031 exchange to swap a foreign property for one in the US.
So, for example, you can exchange a property in Paris for another in Nice or Barcelona, but not for a US property.
Can I deduct mortgage interest on my foreign real estate?
Yes, you can. The rules for deducting mortgage interest are the same whether your property is in the US or abroad.
You can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately) for your primary or second home.
The mortgage must be used to buy, build, or significantly improve the home, and the home must be the one securing the debt.
To get this deduction, you must itemize your deductions on Schedule A of Form 1040 or 1040-SR. If you take the standard deduction, you can’t claim this benefit.
These limits are set until at least the 2025 tax year, after which they will increase to $1 million ($500,000 for separate filers).
*Note
This applies to a home used solely for personal residence, not for rental purposes.
However, if the home is partially rented out while still being the taxpayer’s main residence, there are particular regulations to follow.
If you have questions, you can request a free callback from a tax advisor.
Got questions?
You can request a free callback from a property tax advisor.
Can I deduct foreign property taxes?
No, you cannot deduct foreign property taxes.
Since 2017, foreign property taxes are no longer deductible. This may change after the 2025 tax year, depending on what Congress decides.
Is foreign property depreciable?
Yes. If your property is used as a rental, you can depreciate it on your tax returns.
Unlike US properties, which are depreciated over 27.5 years, foreign residential properties are depreciated over 30 years.
You can only depreciate the building’s value; land cannot be depreciated because it doesn’t wear out.
Foreign rental property. When does a house qualify as a regular rental property?
Tax rules for overseas rental properties can be tricky, depending on how often you use the home for personal purposes versus renting it out.
Generally, you’ll fall into one of two categories: personal residence or rental property.
Personal residence: If you rent out the home for 14 days or fewer each year and use it personally for more than 14 days or 10% of the rental days (whichever is more), you don’t need to report the rental income to the IRS, even if you charge a high rate.
The property is treated as a personal residence, so you can deduct mortgage interest like you would for a second home. However, you can’t deduct any rental losses or expenses.
Rental property: If you rent out the home for more than 14 days and use it personally for fewer than 14 days or 10% of the rental days (whichever is more), the IRS considers it a rental property.
You must report all rental income, but you can also deduct rental expenses like mortgage interest, advertising, insurance, utilities, and property management fees.
You need to divide these expenses based on how many days the property was rented versus used personally.
Also, remember that if family members use the property, it counts as personal use unless you charge them a fair rental price.
How does the US tax global income, particularly in relation to foreign real estate tax obligations?
Unlike many countries that don’t tax income earned abroad, the United States taxes its citizens on their global income.
This means that as an American, you owe taxes on money you make both in the US and overseas, regardless of where you live. This includes income from foreign real estate or any other earnings abroad.
This system, known as citizenship taxation, can sometimes lead to confusion and incorrect tax advice, especially when it comes from those who are used to residence-based taxation, where only local income is taxed.
Do I need to declare an overseas property on my US tax return?
Yes.
This requirement applies even if you have already reported the property on your tax return in the country where you reside.
Tax reporting for overseas rental income
If you own property abroad, you might need to file several US tax forms depending on your situation.
In general, the IRS requires you to report foreign 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.
If you rent out your foreign real estate and have a bank account for the rent, you must file the Report of Foreign Bank and Financial Accounts (FBAR) if the total value of all your foreign accounts is $10,000 or more at any point during the year.
Depending on how much you earn, you might also need to fill out FATCA Form 8938.
This form is submitted to FinCEN (The Financial Crimes Enforcement Network) instead of the IRS and outlines the income held in your foreign financial accounts.
You may also need to file Form 5471 if your property is owned through a foreign corporation, or Form 8858 if it’s held in a foreign LLC.
When it comes to reporting your overseas rental income tax on your US tax return, how you acquired it makes a big difference.
If you bought the property directly, without involving any foreign business entity, you’ll need to report your rental income and expenses on Schedule E of your tax return.
However, if you purchased the property through a foreign business entity like an LLC, corporation, or partnership, things get a bit more complex.
Depending on the type of entity and the number of owners involved (such as a spouse), additional IRS forms may be required.
Can double taxation treaties help me pay less tax?
If you rent out a property abroad, you might need to pay taxes in that country.
If you’re a US citizen making money in another country, a tax treaty might lower the taxes you owe to that country. When you file your US tax return, you can then use the foreign tax credit to reduce your US taxes by the amount you already paid to the other country on the same income.
What are the rules for foreign rental property depreciation?
There’s a slight difference in how you report foreign rental property depreciation.
Unlike US rental properties, foreign properties must be depreciated over 30 years instead of the 27.5 years in the US.
If you started renting out a property after January 1, 2018, the depreciation period is 30 years. However, if the rental activity began before that date, the depreciation period is 40 years.
Read more:
Overseas rental income tax – A guide for American investors with overseas property
What foreign property tax deductions can I claim?
For your foreign rental property, you can typically deduct foreign mortgage interest, repair expenses, management fees, and travel costs related to property management.
However, you can no longer deduct foreign property taxes. For detailed guidance, refer to Schedule E of IRS Form 1040.
If your travel involves personal days, only the expenses directly related to managing the property are deductible.
Additionally, the IRS requires reporting foreign rental income and expenses in US dollars (USD). Although there’s no fixed exchange rate, you should use the average exchange rate for the tax year, provided by the IRS.
Can American expats receive tax exemptions for an overseas rental property?
You might be eligible for the Foreign Tax Credit. This credit allows you to offset taxes paid to another country dollar for dollar against your US taxes.
For example, if you paid $4,000 in taxes abroad on your rental income, you can reduce your US tax bill by $4,000 if you qualify for the FTC.
To qualify, the foreign tax must be legal, imposed on you, and already paid or accrued.
I am renting out a foreign property. Who can help me manage my foreign real estate tax in the US and abroad?
At Property Tax International, we specialize in filing rental income tax returns for Americans with properties in Spain, France, Germany, the UK, Ireland, Poland, Hungary, and the US.
Our experienced tax team is focused on ensuring full tax compliance and addressing all your foreign real estate tax obligations both in the US and abroad.
Last year alone, we successfully filed over 322,000 tax returns.
Our mission is to minimize your tax liability while maximizing your profit.
A dedicated tax advisor will prepare your tax return and communicate directly with the tax authorities when necessary.
Why choose Property Tax International over a local accountant?
Here are some reasons our clients choose Property Tax International over local accountants:
- Better value: We offer more affordable services than local accountants.
- Expert peace of mind: With over 25 years of experience in international tax, we guarantee compliance with US and international tax laws while securing every tax deduction you are entitled to.
- Convenience: File taxes in multiple jurisdictions online—no need for multiple accountants.
- No language barriers: We handle all communication with foreign tax authorities, ensuring your forms are filed correctly.
Get started with Property Tax International today.