By Bethany Bouw
In today’s world, it is not uncommon for US citizens and residents to own property abroad. One only has to watch House Hunter’s International to see that there is an interest in owning property outside the US. Sometimes people buy foreign property to live abroad. Sometimes people buy foreign property to rent it out as an investment. And sometimes people buy foreign property for a hybrid personal/investment use.
Real property used for personal purposes like a primary or secondary residence allows you to consider the mortgage interest and real estate taxes for your personal income tax return deductions. You may also be able to report the expenses of your foreign property on a Form 2555 Foreign Earned Income exclusion for purposes of foreign housing considerations.
Foreign real property that is rented out by US citizen and resident owners must be included in their income reported on the Form 1040 as part of their worldwide income. The rental activity is reported on Schedule E Supplemental Income and Loss. Expenses related to the foreign rental are deducted against the rental income.
Foreign rental income is includable in considering your foreign tax credit on Form 1116. Foreign income taxes on the rental income are also includable in the foreign tax credit calculation. Only income or equivalent taxes are potentially creditable for the foreign tax credit. Direct expenses against the rental income must also be included in the foreign tax credit calculation. It isn’t fair to claim a credit for double taxation based on only gross income in one jurisdiction while you pay tax in the US on the income after expenses. Generally speaking, foreign rental income is passive category income and not able to be used in the same “bucket” as the general category income for credit purposes.
Do I report foreign real property on my FBAR or Form 8938 Statement of Specified Foreign Financial Assets?
Foreign real property is not reported on your foreign bank account report and it is not a specified foreign financial asset to be reported on your Form 8938.
If you have foreign real property, whether you use it personally or as a rental property, you should make your tax preparer aware of the property existence. It is important that they are informed of the property, so they can properly advise regarding deductions, exclusions, income, and tax credits. Even if you lose money on the rental, it does not eliminate the reporting requirements.
Ryan & Wetmore has assisted clients with their foreign real estate over the years. We would be happy to assist you if you have concerns about your foreign property and reporting.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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