How to Report Foreign Property Rental Income
Expat Tax Blog | Tax Tips for US Americans Abroad
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Would you like to learn how to report foreign property rental income to the IRS? Maybe you hope to rent out your cozy beach house in Spain or an Airbnb in Milan. Even with the perks of making extra income involved or simply buying property overseas, there are US tax implications to become aware of.
Here at MyExpatTaxes, we’re here to help you figure out your foreign property rental reporting requirements. That way, you can get back to enjoying expat life!
No matter where you live in the world, our expat tax software is the solution for all your US taxes. Our all in one intuitive software is smooth and straightforward to use – even for people who aren’t good in math! Get started and file your expat taxes in under 30 minutes.
Property Rental Income 101
When you live abroad as a US citizen, you can rent out your property and earn money from it. People can rent out their single house, condominium, vacation home, apartment, mobile home, or similar property.
The IRS terms such personal properties as “dwellings” – a residence used for personal purposes for more than 14 days or 10% of the total days rented within the years. Furthermore, US taxpayers can have more than one dwelling as a residence to rent out each year.
Having people rent out your property overseas is called “Foreign Property Rental Income,” The tax rules can get complicated if you’re receiving this income abroad. Why? According to the IRS, there are rules about how many days a person can use their property for rental versus personal.
Foreign Property Rental Income Rules
Just like US citizens who own US rental properties, American expats need to report their rental income if it was sourced by foreign property abroad.
Generally, the rental property rules apply as follows:
- Renting out your home for 14 days or less and use it for 14 or more days, or 10% of the total days the person rented it. The IRS allows you to rent your home to someone for up to 14 days (2 weeks) every year without having to report that income. Therefore, even if you charge $3,000 a night for 14 days, you still don’t have to report the income to the IRS. Your home is considered a personal residence by the IRS, which allows you to deduct mortgage interest under the second/home rules, but does not apply to rental losses or expenses.
- Renting out your home for 15 or more days and using it for 14 days or fewer, or 10% of the total days the person rented it. From this, the IRS views your home to be a rental property, and rental activities are seen as a business. However, if a family member uses your home, it counts as a personal day unless you are charging them rent. In this case, you need to report all rental income to the IRS and are eligible to deduct rental expenses like foreign property taxes, mortgage interest, and more.
Please visit the section How to Report Foreign Property Rental Income to the IRS below to see a visual chart.
Tax Benefits in the US vs. Abroad
Generally speaking, owning property abroad and gaining tax benefits from it is similar to owning a property in the US – with a few exceptions:
- Tax benefit laws from property owners in the United States are dependent on how they use their property. If, for example, they use their home for rental income, they can deduct mortgage interest plus other expenses like liability insurance and maintenance costs.
Americans abroad are allowed to deduct common expenses like mortgage interest, repairs, maintenance, repairs, utilities, insurance, management fees, and depreciation on their tax return.
Additionally, a difference between a rental property in the US and abroad is that home abroad is depreciated (diminishes) over a 30-40 years period of time depending on the rental start date, instead of 27.5 years for US residential properties. For both cases, you depreciate the value of your property’s building only.
How to Report Foreign Property Rental Income
Here is the step-by-step process of how to report foreign property rental income gains and losses to the IRS.
First, convert your foreign income into USD. Then, you need to know how many days you either lived in your property or rented out during the year to sort out the tax treatment (see below):
|Property Owner’s Usage||Days of Rental Usage||Type of Tax Treatment|
|0 Days||1-365 Days||Rental Property|
|Less than 15 days||15+ days||Holiday Home & Rental Property|
|14 days or more||15+ days||Secondary Residence & Holiday Home|
|More than 15 days||Less than 15 days||Don’t need to report income to the IRS|
Lastly, report your foreign rental income on Form 1040 Schedule E via the MyExpatTaxes software or with another tax company of your choice.
Foreign Property Depreciation
What do you do in the case of foreign property rental depreciation? Having rental property depreciation allows Americans living abroad to reduce US tax that they would otherwise pay on rental property income.
From the IRS, the foreign real estate uses an alternative depreciation system that is also calculated differently than the US:
Foreign property rental depreciation (“useful life period”) is calculated over 30-40 years depending on the rental start date instead of 27.5 years used for US properties. For non-residential foreign properties, depreciation is calculated over 40 years instead of 30.
Reporting Foreign Property Rental Loss
You’ll still need to report foreign property rental loss on your US tax return. However, the only difference comes between the depreciation for foreign and the US/domestic rental properties.
Any overseas property you may have is depreciated over a 30 or 40-year period. It depends on when it was first rented out, instead of being 27/5 years for US residential properties.
Avoiding Double Taxation on Foreign Property Rental
Many Americans living abroad with foreign property rental must pay foreign taxes on their rental income in their host country.
The good news is that expats can claim US foreign tax credits on their property rental income if they pay foreign taxes in another country. These credits can be claimed, up to the same value as the taxes they pay in their host country.
What is the Foreign Tax Credit (FTC)? It’s a dollar-for-dollar tax reduction on your foreign earned income. For example, let’s say you paid the Australian government 200 AUD since you’re a resident of that country. You can then take the equivalent in US dollar credit and apply it to any US taxes you owe. So, you can subtract 200 AUD (convert it into USD!) off of your US tax bill. Learn more about US tax credit and calculations.
To file to claim the FTC, head on over to our app to fill out Form 1116.
Some countries indeed have higher tax rates than the United States and no depreciation system. Therefore, if US citizens abroad do pay more foreign taxes than the US taxes they owe, they can carry the excess taxes forward (for up to ten years), or back a year, or apply them to other income sources from this category of income.
However, US expats owning US property cannot claim the FTC to offset their foreign taxes paid on rental income. But, some countries do allow expats to claim their tax credits based on paid US income tax.
Ready to Report Income?
Whether you’re starting with renting out your property abroad or already a pro, our human expert tax team can assist you along the way. They can help you become 100% tax compliant regardless of how complex your American expat property tax situation is.
Otherwise, feel free to check out our innovative expat tax software. The best US tax software for expats will make your filing experience faster and easier than you ever thought possible. File US expat taxes today!
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