Reporting Taxes on Foreign Property: Rental and Sales

Owning property abroad can offer opportunities for passive income or wealth. However, regarding income, expats must be mindful of how that impacts their US taxes. This article will explain key rules for rental property taxes and capital gains taxes on foreign property.

Renting Out Foreign Property

Renting out property overseas is a great way to earn passive income, but it comes with additional US tax obligations. These requirements depend on rules based on how often the property is rented and used and who owns it.

Understanding the 14-Day Rule

When renting out their foreign property, expats can follow the 14-Day Rule. The 14-Day Rule allows homeowners to rent out their home for a total of 14 days or 10% of the total days rented without needing to report the rental income on their US tax return. Furthermore, the 14-Day Rule is not dependent on the total rental income, meaning individuals can earn however much income they want as long as it does not exceed 14 days.

Ownership Structure and Reporting Requirements

Other rules, such as who owns the property, can significantly affect how you report your rental property income:

• Individuals: Must report their expenses on Schedule E, Form 1040. Expenses such as mortgage interest, repairs, and property management fees will need to be included in Schedule E.
• Businesses: For businesses renting out a property, you have to file Schedule C, Form 1040.
• Foreign entities: Foreign partnerships or corporations will require additional forms, such as Form 5471 for foreign corporations or Form 8865 for foreign partnerships, to report their underlying rental activity.

Tracking Rental Days and Usage

Reporting rental income determines how many days of the year the property was rented.

Reporting Rental Income and Deductions

Foreign property rental depreciation (“useful life period”) can be calculated using two methods: the Alternative Depreciation System (ADS) or the General Depreciation System (GDS).

• The ADS is used for foreign property depreciation, deeming a useful life of 40 years for non-residential and 30 years for residential property.
• The GDS depreciates US properties at 27.5 years for residential and 39 years for non-residential.

Selling Your Primary Residency

Depending on whether you are selling your primary home or secondary home will determine which tax measures are used. For instance, if an expat sells their primary home, they can use  Section 121 Exclusion to exclude a certain amount of capital gain from their US tax liability.

• Single filers can exclude up to $250,000 of capital gains.
• Married couples filing jointly can exclude up to $500,000.

Additionally, expats must have lived in this house for two of five years before selling. Otherwise, they cannot claim this benefit.

Secondary Home

Expats will be subject to capital gains taxes for secondary homes, but they can offset their US tax liability by using the Foreign Tax Credit. The Foreign Tax Credit calculates the amount of foreign taxes an expat has paid, converts the foreign currency into US dollars, and allows it to be used as a credit toward any taxes owed. This credit is especially helpful in minimizing the impact of both rental property tax and US capital gains tax liabilities.

Calculating Capital Gains

To calculate your capital gains, use the following formula:

Sale Price + Renovation/Repair Costs – Original Purchase Price = Capital Gain

Calculation:

First, add the renovation costs to the sale price:

$300,000 (Sale Price) + $20,000 (Renovation Costs) = $320,000

Then, subtract the original purchase price from the adjusted sale price:

$320,000 (Adjusted Sale Price) – $200,000 (Original Purchase Price) = $80,000 (Capital Gain)

If you rented out your home prior to selling, you’ll need to calculate your depreciation recapture. This is the total amount of depreciation expenses claimed while renting out your home, which is then subtracted from your cost basis, which may then increase your total taxable gain.

Forms for Selling and Reporting Property

Selling foreign property can become more difficult when foreign bank accounts, capital gains taxes, and rental tax rules are considered. Taxpayers must report all sales for US properties using:

• Individuals: File Form 8949 (if a personal property)
• Businesses: File Form 4797, Sales of Business Property and Schedule D, Form 1040, Capital Gains and Losses

Other forms to consider when reporting a sale of property are:

• FBAR (FinCEN Form 114): If your foreign financial accounts collectively exceed $10,000 at any point during the year, you will need to file an FBAR
• Form 8938: If your foreign assets exceed a certain threshold, you must file FATCA Form 8938.

Need Some Assistance?

Whether it’s selling or renting your foreign property, MyExpatTaxes is here to help. With our Premium package, our tax professionals will answer your questions. Let us help you manage your rental property and capital gains taxes so you can breathe a little easier.

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