Reporting Foreign Rental Income

April 14, 2020

The U.S. treats foreign rental properties in the same manner it treats domestic rental properties — when the property in question is owned by a U.S. citizen or green card holder. Expats who invest in rental properties while living abroad must report earned rental income on U.S. taxes. The matter can be confusing since there are many intricacies, depending on the country where the property is owned.

Here’s everything you need to know about how to report rental income from a foreign country.

Requirements for Reporting Foreign Rental Income

Expats living abroad are required to report all foreign earned income on U.S. tax returns, including rental property income. This holds true whether the property was purchased or inherited. Just as with domestic rentals, rental income should be reported on a Schedule E form.

Property owners can offset their income by deducting rental property expenses. Common expenses that expats can deduct include: 

  • Utilities, such as electricity or water
  • Advertising expenses, such as real estate agent fees
  • Maintenance expenses, such as landscaping, repainting or snow shoveling
  • Repairs (note that remodels must be depreciated rather than deducted)
  • Fees paid to property managers
  • Travel expenses related to property visits
  • Mortgage insurance premiums 

Before you can deduct these expenses, you must keep accurate records pertaining to any foreign-owned rental property. You may wish to keep a log of maintenance by date, category and amount, or log miles traveled for landlord purposes using a mileage tracking app. Staying organized not only helps you claim every deduction to which you are lawfully entitled, it provides proof in the event of an audit.

How to Report Foreign Rental Income on US Taxes

Good record keeping practices, such as those mentioned above, will help you stay organized with managing a rental property. Of course, if you hire a property manager, this person will keep records on your behalf and send you reports on a predetermined basis (e.g., quarterly or monthly). 

There are some considerations to note when reporting your income and expenses on U.S. taxes:

  • First, all rental property income and expenses must be converted from the local currency into dollars for tax reporting purposes. These conversions are not difficult, but they add a layer of complexity when filing taxes from overseas.
  • Expats must complete the Foreign Bank Account Report (FBAR) as part of their taxes. Any bank accounts that are set up for rental property operation — or escrow accounts that are used to pay mortgage interest, homeowners insurance or other fees — should be reported on the FBAR. Failure to report the correct accounts on FBAR could lead to a penalty.
  • Some expats use property for dual purposes, visiting throughout the year as a vacation home and renting property when the home is not in use. If you have a home overseas that you use as a vacation and rental property, there are complexities to note. The IRS allows homeowners a grace period of 15 or fewer days of rental. This means, if you only rented your property for 10 days, there’s no need to declare it on U.S. taxes.
  • Properties rented for more than 15 days are treated as dual-use second home and rental properties. Properties used only as rental are treated as rental properties. Expat CPA can help you determine where your property fits and file the appropriate forms. Expat CPA can also advise you if you’ve recently converted a second home to a rental property and aren’t sure how to properly file taxes.

Rental income reporting is less complex for landlords who manage the property as a sole proprietor than those whose ownership is part of a limited liability company, trust, foreign corporation or other business entity. Here as well, Expat CPA can make sure every required tax form is correctly filed.

Get Help From Expat CPA 

For 2020, U.S. tax filing deadlines are extended to July 15. Get help from a CPA with experience serving expats with complex tax needs, including expats who own foreign rental property. To find out how we can help, contact us.

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