Renting out US property while living overseas is a common theme among many Americans abroad. Many don’t want to let go of their residence in the States because they plan to come back soon or want to make some income on the side. Secondly, renting out property is a great way to hold the equity built over time while having the home pay for itself.
If you’re a US citizen abroad and have people renting out your home in the United States, you’ll need to report a few things to the IRS every year. We’ll explain more about that below.
Managing US Rental Expenses
It can become expensive if you hire US management companies to report income, and expenses to the IRS regarding your property. The good part of this is that these companies typically provide a yearly income and expense report you can use when filing US expat taxes.
If you decide to manage your US property from abroad, you can keep track of all your US home transactions through a rental property management software or online spreadsheet. When you effectively record and keep financial details about your home in the States, you can reduce your expat tax liability.
Tracking US Property Expenses
One of the largest deductions you as an American expat could have with your US home is your rental property’s depreciation. Depreciation is a reduction in your asset’s value over time due to wear and tear.
Take, for example, a home, that over time, has paint peeling off the walls, and its stairs become creaky. Due to the natural wear and tear of the home, it may look unappealing for interested homeowners, and thus, the sale price goes down.
Therefore, from the very date your house goes up for rent, you can start the depreciation process from a 27.5 year period. The basis, or amount you deprecated, will be less of the adjusted basis or less of the fair market value of your home.
To understand the depreciation amount, you can for example, deduct the property’s initial cost and divide it by 27.5 years. (The exact calculation is more complex than that, however we’ll take care of the smaller details within MyExpatTaxes’ software automatically for you).
You can include additional deductible home expenses in your US tax forms, some common ones include:
- home repairs
- homeowner association dues
- travel expenses to repair the property or collect rent
- mortgage interest
Gross Income Reporting to the IRS
The IRS states that when you rent out property in the States, you must include info about your gross income from all of the amounts you received rent. Any expenses from renting property will be deducted from your gross rental income. Generally, expats like yourself can deduct rental expenses in the year you pay them. Learn more through Publication 527.
US and Income Taxes
All you received as US rent while living as an American abroad must be reported on your tax return every year. This also goes for:
- The normal monthly rental fees
- What your tenants pay for repair services – like infestation clearing or window repairs
- When a tenant is unable to pay rent on time (defaults on payments)
- The tenant damages the home and thus cannot get their security deposit returned. You can claim income on their security deposit!
Additionally, security deposits are not taxable income. Plus, you can claim the fair market value of the property’s rent as income if for example, your tenant trades their services in exchange for rent.
According to the IRS, you can use Schedule E (Form 1040) to report:
- income or loss from rental real estate, estates, royalties, trusts, S corporations, partnerships, and residual interests in REMICs – real estate mortgage investment conduits.
Or better yet, file Schedule E through our expat tax software, easily and for an affordable price!
You can report up to 3 residential properties per Schedule. Furthermore, the US state your property could charge income tax. Which means you may have to file a state tax return. It really depends on the tax rules in each state, and you can contact us if you want to make sure.
Foreign Countries Taxing US Rental Income
Is it possible for the foreign country you’re living in as a US citizen abroad to tax your US rental income?
It really depends on the tax rules in a foreign country. Generally, if the foreign country you live in taxes its residents on their worldwide income (like Eritrea), then yes, most likely, your US rental income will be taxed.
Deducting Losses on US Expat Taxes
You could deduct up to $25,000 of loss on your US expat taxes if you ”participated” in rental real estate. Participation means you were involved in making management decisions and own at least 10% of the US property.
If you were not participating, your rental loss cannot exceed the income generated by the activity on your US taxes.
Using a Property Management Company
The property management usually manages your property totally and relieves you of all rental properties. Yet, having a part – even if small, can be beneficial tax-wise. Especially when it comes to your property if you are facing property loss.
As long as you remain active somehow with your US rental property, you can reduce your expat taxes.
Selling Your US Property
While it’s understandable you don’t want to let go of your US home when living abroad, having it rented does bring about tax responsibilities. One of them is having to collect all depreciation from when the property was rented, regardless if you are selling the property at a loss or gain.
Then, the property value reduction needs to be taxed. And, even if no deduction from the depreciation is taken, your net loss or profit on the arrangement of the US property needs to be calculated as if depreciation was taken.
Need Some Help?
Does renting out US property while living overseas and filling out Schedule E sound complicated? It is. But don’t worry, our tax professionals can help you. Especially with selling and reporting US property for your expat taxes on Schedule E through our software and beyond.
Please keep in mind though, even if you have a rental property as an American living abroad that is not located in the US, you would still need to report that information on your tax return as well! Reach out to one of our tax professionals today to get started on saving money and reporting the right info to the IRS.