How Foreign Real Estate Property Is Taxed in the U.S.

One of the most popular misconceptions among Americans living abroad is that they are exempt from paying taxes. This is especially frequent because very few countries tax income earned overseas, causing Americans to believe the same rules apply to them.

This is untrue. Whether you are at home or abroad, you will have to pay taxes to both the IRS and your state or territory. Even international real estate purchases may have tax repercussions. The tax treatment of residences is the same whether the property is in the United States or another country.

Understanding U.S. Taxes Global Income

Many countries exclude global income from their tax bases. In legal words, nationals do not have to pay taxes when earning money abroad. 

The United States is among the few countries that tax global income. This is known as citizenship taxes, which refers to taxing based on your citizenship. In contrast, residence taxation refers to taxation depending on your location. Citizenship taxes frequently result in Americans receiving wrong tax advice, as foreign nationals and even (occasionally) professionals provide advice based on their own country’s residence regulations. 

If you earn money while traveling abroad as an American, you must pay taxes on it. You will also be taxed on any money earned overseas. This covers any revenue or profits earned from real estate in foreign countries.

Taxes on Foreign Property

As an American living overseas, you are not required to record the purchase of foreign property on your U.S. tax return. However, you must disclose any gain or loss from selling a foreign property. Likewise, you must declare any rental income you receive. 

The standards for reporting a capital gain or loss are generally the same, regardless of whether the property is located in the United States or abroad. Still, there are a few details that Americans living overseas should know. A number of factors will determine whether or not you owe taxes. 

Foreign Rental Property

The tax requirements become more complicated if you make rental income from the home. Different criteria apply based on how many days you use the residence for personal rather than rental purposes. 

Personal residence

You rent out the your house for 14 days or less and then utilize it for more than 14 days or 10% of the total number of days rented, whichever is greater. You can rent out your home for up to two weeks (14 nights) per year without declaring the income to the Internal Revenue Service. Even if you rent it out for $5,000 per night, you don’t have to record the rental income if you don’t rent for more than 14 days.

The house is deemed a personal residence so that you can deduct mortgage interest under the regular second-home rules. However, you are not allowed to deduct rental expenses or losses.

Rental  Property

You rent out the home for more than 14 days but utilize it for less than 14 days or 10% of the total number of days rented, whichever is larger. In this situation, the IRS considers the home a rental property, and the activities are considered business. You must disclose all rental revenue to the Internal Revenue Service. Still, the good news is that you can deduct rental expenses, including mortgage interest, advertising costs, insurance premiums, utilities, and property management fees. The expenses must be split between rental and personal usage based on the number of days the residence was used for each purpose.

Tax Implications of Selling Property Abroad

Significant variations exist between selling a rental home and selling a primary dwelling. With rental property, you must disclose the transaction, whether you made a profit or a loss. If you sell your house at a loss, you are not required to declare it and cannot deduct it. However, if you sell your residence for a profit, you will be subject to taxes.   

However, you may be able to exclude up to $250,000 in gain on a personal dwelling ($500,000 if married and filing jointly). You must have owned and resided on the property for at least two of the last five years to qualify for this exclusion. This exclusion applies to both U.S. and international property. Any gains that cannot be excluded will be taxed at lower capital gains rates.   

If the gain does not qualify or is not entirely excluded, it is deemed foreign source income and can be reduced by the Foreign Tax Credit. However, it is not considered foreign-earned income and hence cannot be excluded under the Foreign Earned Income Exclusion. 

To compute the gain, the purchase and sale amounts must be converted to USD on the transaction date. All income must be reported in U.S. dollars for U.S. expat taxes. 

Takeaway 

For Americans, the taxes on international real estate are the same as those on domestically held assets. However, there may be various legislation in the country where your property is located that you must observe. Remember that to keep track of your conversions, you must calculate the value of any transaction in dollars at the time of each tax event. Your overseas activity may also qualify you for international tax credits in some situations.