Taxation of income from overseas real estate in the United States: 5 key facts



5 basic rules for taxation of foreign real estate and reporting in the United States: It is very common for Faces of the USA who are foreign nationals or otherwise have foreign investment to invest in overseas property. Many foreign countries have different overseas property rules than the United States and IRS do. For example, in some foreign countries, real estate income is not taxed until certain thresholds are met, while in other countries there are deductions such as depreciation not applicable. Let’s look at five (5) important tax implications of owning overseas property in the United States:

Rental income abroad

When overseas rental property brings income that income subject to U.S. tax. It doesn’t matter if the income escapes taxation abroad. If the taxpayer has already paid foreign tax on income earned from overseas property rentals, they can usually claim a foreign tax credit using IRS Form 1116… Depending on what the tax rate is abroad, the taxpayer may have more or less foreign tax credit than necessary. If they have excess foreign tax credit, they can use the credits in the future, but if they don’t have enough foreign tax credits, the taxpayer may be forced to pay additional US foreign income tax on their US tax return.

Depreciation of foreign real estate in the United States

Foreign structures that are used for rental purposes may be depreciated in the United States. Most overseas rented properties can be amortized using a 30-year straight line (it was updated in 2018 when it was 40 years old). It is important to note that when a taxpayer sells a house in the future, depreciation accounted for in the adjusted base calculation – and the benefit is lost. Therefore, the taxpayer must consider its ultimate foreign property goals and its own status in the United States in future years – before claiming depreciation.

Overseas property sales are taxable (capital gains)

When a person in the US sells an overseas property, that asset is taxed as capital gains – and the same is true for overseas rental property. Consequently, when a person in the United States owns and sells an overseas rental property, the rental property must be included on the US tax return using Table D and applicable spot rates for currency translation.

Overseas property and departure from the USA

When a person expatriates from the USA and is considered covered expat, there may be income tax consequences on the current market value of the property (and other assets), which are collectively referred to as output tax. There are certain exceptions and exceptions to the amount of capital gains that an expatriate can exclude when calculating the departure tax, and increasing baseline rules for overseas property may apply.

Gifts from a foreign person in relation to real estate abroad

When a U.S. citizen receives a gift from an alien that includes foreign property, the value of the overseas rental property is a consideration in determining whether a taxpayer has met the threshold. Form 3520 – which is used in part to report large gift transactions from non-US citizens. Recently, the Internal Revenue Service carried out imposition of a fine fun for US individuals who have not met the 3520 reporting requirements.

Overseas property has implications for U.S. taxes and reporting

Although foreign property is located outside the United States, US individuals who own foreign property may have certain US tax and reporting requirements for foreign property. Therefore, it is important to be aware of issues related to foreign real estate and US real estate taxes, asset reporting, and gift tax implications.


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