Do you wish to know about rental property taxes? Do you have a foreign rental property? You must know all the updates related to foreign rental property taxes. Stay tuned and continue to read everything about foreign rental property taxes at USTAXFiling.
Rental property is no doubt a profitable investment and is the best choice for expats who are planning to earn passive income. Also it is also subject to US income taxation. If you have any foreign rental property, you have to report your income like any other US property owner.
The income tax regulations for a foreign rental property are the same as for property located in the US. Also, there are a few differences. In this blog, we will discuss everything related to rental property taxes that you must know.
Does the IRS Tax Foreign Rental Property?
Yes, same as the rental property situated in the United States, foreign rental property is owned by a long-term resident or citizen of the United States and is subject to taxation of the United States. If you have a second home or even a foreign weekend home that you rent out, you have to report income from this rental or vacation house if your rental income meets the necessary criteria:
Any rent that you receive will be determined as taxable income. Any expense linked with operating the rental property is used as a deduction against income-taxable rental.
For instance, let us say you collect $30,000 in rental income. In 2022 and in the same year, the expenses needed to operate and maintain your rental income came to $10,000. It means that you have an income-taxable rental of $20,000 (the rental income is $30,000 less than the $10,000 in rental property expenses.
How You Should Report Foreign Rental Income from Real Estate
Foreign rental property is the same as domestic rental property. It means that if you are an expat property owner, you have to report your foreign rental expenses and income the same as the rental property in the US. There are only a few distinctions, like the expat tax credits available for the changes to depreciation regulations and expat property owners.
With domestic property, how you will decide the structure used to hold the report of your foreign income from rent may be considered by the structure used to hold the foreign property real estate ownership.
For instance, the best choice is LLC or a Limited liability company. If the foreign rental property is directly owned or through a single-person limited liability company that is determined as a disregarded entity for US tax purposes, you might have to report your rental expenses and income on Schedule E associated with your US income tax return.
If you have ownership via an LLC US with more than one member, except for LLCs that are built by spouses in the community of US property states or even through a foreign partnership, foreign trust, or even foreign trust, then you have reporting requirements and additional filings that includes Form 5471,1120,1041,8865, 1065
Also, foreign rental expenses must be reported in dollars. There is a possibility that you have to change the foreign currency you receive from rent into USD. But how do you do it?
Currently, the IRS has no official exchange rate. Also, you must use the exchange rate that prevails when you sell or receive the property and make any capital improvements. The website of IRS has more details about foreign currency exchange rates and foreign currency and yearly average currency exchange rates.
Other US Reporting Requirements
You might have FBAR reporting needs if you establish a foreign bank account for paying any expenses and receiving income related to the foreign rental asset. FBAR reporting laws need that all the citizens of the US should file a report if they have at least $10,000 stored in multiple or one foreign financial account.
Also, if the foreign rental is held through a foreign entity like a partnership, trust, or foreign corporation, you have to report your interest in that entity on a FATCA report or Form 8938.
How to Depreciate Foreign Rental Assets
One of the major differences in having a foreign asset rental overseas versus domestically is depreciation. Depreciation means an accounting method to allocate the cost of tangible property over its useful life and is used to calculate declines in value. In simple terms, IRS permits a depreciation cost against any rental income depending on the cost of the abroad rental property or regular rental property.
First, consider a hypothetical case to see how this works in reality. If the cost of your domestic rental asset was $275000, the depreciation expense would be $275000 divided by the IRS allowed 27.5 years of useful life for residential asset for an annual depreciation cost of $10,000. The depreciation cost of $10,000 offset your rental income and decreases any associated tax liability connected with the income rental.
Also, foreign real estate follows a different set of laws. When it comes to section 168 (g)(1)(A), any tangible asset that is used outside the United States during the financial year should use another depreciation system. The part of the IRC or Internal Revenue Code (Section 168 (g)(2)(C) specifies 30 years. Before Tax Cuts and Jobs Act 2017, the time length was 40 years. In simple words, when you search for how to depreciate foreign rental assets rather than using the 27.5 years as discussed above, the specific time is increased to 30 years.
For instance, if the expense of your foreign abroad rental asset was $275000, the expense of depreciation will be $275000 divided by the IRS allowed 30 years (the life of the asset per the ADS or alternative depreciation system) and arrive at a depreciation cost of deduction every year of $9,167.
Can you use the FTC for Foreign rental income?
In several scenarios, yes. If you operate your house overseas as a rental income property, you have to pay foreign income taxes on your foreign rental property income, while a similar income is subject to tax here in the United States. Also, tax accrued or paid to a foreign nation may be used to offset US income taxes through the Foreign tax credit.
For instance, if you accrued or paid $100 of income tax in a foreign nation, you have to deduct $100 from your domestic income tax liability. There is a maximum allowable income tax credit. Also, you cannot claim a credit of more than the tax amount of the US on the rental income after deducting costs or expenses.
Get expert assistance with your foreign rental property taxes.
You must have got a clear picture related to the tax implications for your foreign rental property. If you have any doubts, don’t worry, as our USTAXFiling experts are here to help you anytime. Also, we at USTAXFiling will help you prepare and file your expat income tax return on your behalf while you can sit back at home and enjoy your life.
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