“The best things in life are free, but sooner or later the government will find a way to tax them.” - Anonymous
Unless you’re living abroad on a short term contract, or you’re a digital nomad, exploring the world while working remotely, as an expat, you might consider buying property overseas at some point.
Expats most often buy foreign real estate as a home, but many also buy foreign property to provide them with rental income.
It’s important to understand the IRS tax implications though, when you’re buying, owning, selling, or renting foreign property.
In this article, you’ll learn about:
• Tax considerations when buying foreign real estate
• Tax considerations when owning foreign real estate
• Tax considerations when owning foreign rental properties
• Tax considerations when selling foreign real estate
Tax considerations when buying foreign real estate
In general, the US treats real estate ownership abroad similarly to in the US.
This means that there are no US taxes to pay when you buy real estate overseas. However, the transaction may trigger a reporting requirement, and you may be liable to pay foreign taxes.
Many foreign countries impose a tax when you buy a property, such as Stamp Duty in the UK, so always find out about local property purchase taxes in the country where you’re buying to avoid being caught unawares.
There may also be charges relating to transferring money into a country to buy foreign property, both from foreign banks (and there will always be transfer fees, of course) and foreign governments.
Lastly, before calculating how much you have to spend on a property abroad, if you are transferring money from the US, don’t forget to factor in currency exchange costs.
It’s always worth talking to an international currency exchange specialist, who will obtain the best exchange rate and minimize fees, and they may be able to lock in an exchange rate for you in advance to minimize the risk of negative fluctuations (though you risk not benefiting from positive fluctuations too in this scenario).
While the IRS doesn’t require you to report the fact that you’re buying real estate abroad, if you transfer money from the US into a foreign bank account, having the money in a foreign account, even momentarily, triggers FBAR and FATCA reporting (FinCEN Form 114 and IRS Form 8939, respectively). These are reporting forms for Americans with foreign accounts and assets that are required if you exceed $10,000 and $200,000 (respectively) in total in your foreign financial accounts. - Nathalie Goldstein EA, MD at MyExpatTaxes
Tax considerations when owning foreign real estate
Similarly, while the IRS doesn’t tax ownership of a foreign home, the foreign country where the property is might do so.
There are different types of foreign taxes on real estate ownership, depending on the country, including local property taxes, and wealth taxes imposed on your total assets, including foreign real estate, in some countries. Always seek reliable local advice to ensure that you understand your local obligations.
Once you own foreign real estate, if you haven’t already, you’ll need to do some estate planning. If you don’t have assets in the US, you may only need to do estate planning in the foreign country where you live, however if you do have assets in the US, you should seek advice and create wills in both the US and in the foreign country.
You may want to deduct your mortgage interest on your US tax return if it is more than your standard deduction, if you owe any after claiming either the Foreign Earned Income Exclusion or the Foreign Tax Credit. From 2017 and until 2025, you can deduct the interest that you pay on the first $750,000 if you file jointly, or $375,000 if you’re single or married and filing separately. After 2025, it is due to revert to $1 million.
Another consideration (which also applies to rental property abroad) is that if you own foreign real estate in a foreign company or trust rather than directly, you will have a US reporting and sometimes tax liability related to the foreign company or trust. This could mean filing Form 5471 or Form 8858 for foreign companies, and Form 3520 and/or 3520 for foreign trusts.
Note that foreign real estate doesn’t have to be reported on Form 8938 under FATCA rules.
Tax considerations when owning foreign rental properties
Many of the same considerations apply for owning foreign rental properties as for owning a home abroad. There are also some additional ones.
So you still need to be aware of local property taxes, both when buying and once you own, you still need to do estate planning, and you need to be aware of US reporting rules if you own foreign rental properties through a company or trust.
Additionally, you will have to report your foreign rental income, along with all your global income, on Form 1040 Schedule E every year assuming you're not in the business of renting. You can deduct your rental expenses though, and you may also have to pay foreign income tax on it. If so, you can claim US tax credits to avoid being double-taxed.
In general, the same deductions can be applied as for rental property in the US. For depreciation however, you have to use a 40 year schedule for foreign rental properties purchased prior to 2018, otherwise a 30 year schedule, rather than 27.5 years for rental properties in the US.
Some foreign countries don’t allow depreciation as an expense, so you may end up with a higher foreign tax liability on your rental income (or a taxable profit for your foreign taxes and a loss for your US reporting). In this scenario, you can claim US tax credits for the foreign taxes you pay as a carryover
Tax considerations when selling foreign real estate
When you sell real estate abroad, there may be a foreign and a US capital gains tax liability.
The IRS usually grants a $250,000 exclusion from US capital gains tax per person ($500,000 if you’re married filing jointly) if you are selling your primary home (See Section 121 Exclusion Rules) Above this, the rate you pay depends on your taxable income, so it will be 0% if your income level is less than $40,400 ($80,800 if filing jointly), or otherwise 15% or 20%.
Keep in mind, when selling a rental property, your cost basis must be decreased by any rental depreciation recapture. Essentially when you claim rental depreciation as a deduction against rental income, you have to reduce your cost basis by the same amount.
Many foreign countries impose capital gains taxes too on the sale of property, though some don’t charge it when you sell your home (so just on rental real estate).
When Boris Johnson was mayor of London, several years before he was UK Prime Minister, he decided to sell his London home. In the UK, you don’t pay capital gains tax on the sale of your home. However, he had been born in the US while his father was working there for a short time, which meant he had the right to US citizenship. This in turn meant that he had to pay US capital gains tax when he sold his UK home. So don’t be surprised like Boris Johnson if you receive a US capital gains tax bill when you sell your home abroad, even if you don’t have a local capital gains tax liability.
If you have to pay foreign and US capital gains taxes, you can normally claim tax credits to offset the double taxation risk.
If you sell rental property and immediately buy other rental property abroad, you may be able to avoid US capital gains taxes under Section 1031 like-kind exchange rules, but this is only possible if you sell abroad and buy abroad, or sell in the US and buy in the US, and not if you sell abroad and buy in the US or vice versa.
If you have any questions, don't hesitate to contact us.
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