The American
Own and Rent Property Abroad?
U.S. IRS Tax Rules You Must Follow
By Don D. Nelson, Attorney, CPA
W
hen you are renting out your real property in a foreign country, as a U.S. Citizen or permanent resident, you must not only comply with all tax requirements of that foreign country, but you must also report all rental information on your U.S. income tax return. The rules are almost the same as those for rental property located in the U.S., but with some variations. If you own a foreign rental in your individual name, you report all of your rental income and expenses on Schedule E of your Form 1040. All of the allowable expenses are the same as for U.S. property. Expenses you can deduct include management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance, depreciation, and other miscellaneous expenses. Unlike property located in the U.S., you must depreciate the property (amount allocatable to the structure) over a 40 year period rather than shorter times sometimes allowed for U.S. property. You can take a credit against your U.S. federal income tax for income taxes paid to the foreign country on your net rental income after deducting all expenses. That credit is limited
to the amount of U.S. Federal tax you paid on that rental income on your tax return. Any unused foreign tax credit can be carried over to future year. Most U.S. states do not allow any credit for income taxes paid foreign countries. Any Value Added Tax (VAT) or occupancy tax collected from the renter should be included in your rental income, but then you can deduct out those taxes so you do not have to pay any tax on those items. The same restrictions and limited allowable deductions for “vacation homes� apply when you have occupied the property yourself part of the time and rented it out to third parties at other times. When the property is sold (if it is held in your individual name ) your net gain is taxed in the US at the applicable lower capital gains rates, and you can claim a credit against your US tax on the sale for the foreign capital gains or income taxes paid on that profit to Mexico. If the property was used for the two years during the previous five years prior to sale as your personal primary residence (you must actually live in it full time during that period), you may
be able to exclude up to $500,000 of the gain from your U.S. income taxes under the exclusion allowed for sales of personal residences. If the property was rented out part of that time, some of the gain on sale will be subject to US income tax. If your foreign real property is held through a foreign corporation, there can be adverse U.S. tax consequences while renting out the property and upon sale on your US tax return. With the proper type of foreign corporation, certain elections can be made with the IRS which will negate almost of these U.S. tax problems. These elections are only made for U.S. tax purposes and do not in any way affect the way your foreign corporation is taxed under the tax laws of its country of location.
Other U.S. Tax Forms that may be required: Form 8865: If you own your foreign rental in a foreign partnership (if you own 10% or more) or LLC you must filed this form each year with your personal tax return to report the details of its income, expenses, etc.
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