Reporting Foreign Rental Income on Property Abroad
US expats who live abroad make money in many different ways. Your employer in the US might offer you a position in another country or you may decide to travel and start your own business. Whether you’re freelancing or working for a traditional employer, you might also consider investing in property abroad. This could help you earn rental income to supplement your existing salary.
Investing in foreign properties and renting them out can be quite lucrative depending on the number of investment properties you own and where they’re located. They also require some key responsibilities, too. As a landlord, you’re responsible for ensuring the property is well-maintained, taking care of tenant requests, and keeping the structure up to code. One additional responsibility that you may not be aware of is your US tax reporting requirements. US expats must report foreign rental income on US tax returns – even if it has already been reported on a foreign tax return.
We’ll walk you through everything you need to know about when you’re required to report foreign rental income on your US taxes. We’ll also explain how to report this source of income on your tax returns and how to lower your US tax bill through tax breaks.
Do you have to report foreign-owned properties on your US tax return?
Yes, you’ll need to report any properties you own on your US tax return, whether they’re located in the US or another country. You’ll need to do this even if you’ve already reported your property on your tax return in the country where you’re residing.
The IRS classifies foreign rental properties in different ways – as regular rental properties, vacation homes, secondary properties, or primary residences. Here’s how to know what the IRS considers your property to be:
When is a house classified as a regular rental property?
The IRS considers a foreign property a regular rental property if:
- – You did not use the home for personal use at all during the tax year AND
- – You rented it out at any time during the year
So, if you purchased a home in Bali and did not live in the house in 2021 and you rented it out for 200 days, it would be considered a regular rental property. Even if you didn’t rent it out because you were renovating or couldn’t find a tenant, as long as you did not reside in the property for even a day in 2021, the US classifies it as a regular rental property.
When is a house classified as a vacation home and rental property?
The IRS considers a foreign property a vacation home and rental property if you rented it out for more than 15 days and:
- – You used the property for 14 days or less during the tax year OR
- – You used the property for less than 10% of the time you rented it out
For instance, if you have a property in New Zealand that you stayed in for two weeks in 2021 and you rented it out through Airbnb the rest of the year for a total of 220 days, it’s a vacation home and rental property.
When is a house classified as a vacation home and secondary property?
The IRS considers a foreign property a vacation home and secondary property if you rented it out for more than 14 days and:
- – You used the foreign property for 15 days or more during the tax year OR
- – You used the foreign property for more than 10% of the time you rented it out
When is a house not classified as a rental property?
Lastly, if you reside in your foreign property for more than 15 days and do not rent it out at all, or you rent it out less than 15 days during the tax year, you will not need to report it as a rental property on your taxes. If the foreign property is your primary residence (if this is where you lived most of the year), you would need to report the address to take the Foreign Earned Income Exclusion. If the foreign property is not your primary residence, then there is no obligation to report it at all.
How your Foreign Property is Owned: It Matters
The way you bought your rental property also determines how the IRS requires you to report it on your US tax return. Most foreign countries will not let US expats buy property unless they are a resident – and even then, if they are still a US citizen, it’s more difficult to buy a home in another country. To do so, they’ll often have to buy the property as a foreign business entity, like an LLC (limited liability company), corporation, or partnership.
If you own a rental property directly, with no foreign entity in between, you must report your rental income and expenses on Schedule E of your tax return.
Depending on the legal form of the foreign business entity and the number of owners (such as a spouse), you may be required to report the rental activity on through a foreign partnership, corporation, or trust, the IRS requires additional forms, which may include:
- – Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations
- – Form 8865 – Return of US Persons with Respect to Certain Foreign Partnerships
- – Form 8858 – Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)
- – Form 3520-A – Annual Information Return of Foreign Trust With a U.S. Owner
How to Report your Foreign Rental Income
For the most part, the IRS has you report foreign rental income the same way you would report US rental income, on Form 1040, Schedule E. You’ll also report rental expenses and losses on this form, which may include maintenance and repair fees, property taxes, and management fees.
The way you report depreciation is a bit different, though. Unlike US rental properties, your foreign property must be depreciated over a 30-year period instead of the 27.5-year period in the US. The IRS also requires you to report your foreign rental income and expenses in US dollars (USD). There’s no set exchange rate, so use the average exchange rate for the tax year, as provided by the IRS (link to website)
Other Reporting Requirements for Foreign Rental Properties
In addition to your tax return and rental income reporting, you might have to file an FBAR if you use a foreign bank account to manage your foreign rental income. The FBAR (Report of Foreign Bank and Financial Accounts) is due every year on April 15th (this year’s FBAR was due on April 18th) with an extension available to October 15. This report details income in your foreign financial accounts. You send this to FinCEN (The Financial Crimes Enforcement Network) instead of the IRS.
If you own your foreign rental property through a foreign partnership, corporation, or trust, you may also need to file Form 8938, Statement of Specified Foreign Financial Assets.
Can US expats claim tax exemptions for a foreign rental property?
Since the IRS considers foreign rental property income as passive and not a salary or wage, you cannot use the Foreign Earned Income Exclusion on any income earned through your foreign rental property to lower your tax bill. But, you may be able to claim the Foreign Tax Credit on this income.
The FTC lets you claim a dollar-for-dollar credit for taxes you’ve already paid on income in another country. So, for instance, if you paid $4,000 in taxes to Indonesia on your foreign rental property income and you qualify for the FTC, you can reduce your US tax bill by $4,000. To qualify, the tax you owe to the foreign country must be legal, imposed on you, and you must have already paid or accrued it.
Get Professional Help Managing your Foreign Rental Property Taxes
Bright!Tax helps thousands of US expats with their US tax returns and other reporting requirements every year. Whether you have questions about your foreign rental property reporting requirements, want to learn more about eligible US expat tax breaks, or want an experienced CPA to sign off on your tax return, we can help.
Get started by connecting with one of our top-rated CPAs.