Foreign Rental Property Tax Reporting
If you are an American who owns rental property in a foreign country, there are certain IRS tax reporting requirements you need to know. Find full details below.
Generally, except for the following differences, foreign rental property is reported on a tax return in the same manner as a domestic rental.
Depreciation
The ADS method of depreciation is applied for tangible property predominantly used outside the U.S. (Code Sec. 168(g)(1)(A)). This would include both residential and nonpresidential foreign rental property. Under ADS, the straight-line method is used, and the recovery periods for assets commonly found in rentals are:
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40 years for the real property (building portion) (30 years for residential rental property placed in service in 2018 or later)
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9 years for appliances, carpets and furniture (Ann 99-82, 1999-32 IRB 244); and
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20 years for land improvements such as fences and landscaping.
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Personal property for which there is no class life has a recovery period of 12 years.
Passive Loss Rules
The passive loss rules apply to a foreign rental in the same manner as a domestic rental.
Real Estate Professional Issue
Generally it would be difficult to qualify for real estate professional treatment for a rental located in a foreign country unless both the rental and the tax home of the landlord were close to the border of an adjacent country (Canada or Mexico) so the owner can meet the personal services and material participation requirements. However, there is no restriction against including a foreign rental in the aggregation election (Code Sec. 469(c)(7)(A)).
1031 Exchange
Real property located in the U.S. and real property located outside the U.S. aren't property of a like-kind for purposes of the like-kind exchange rules under Code Sec. 1031(h).
Sec 199A Deduction
The 20% of qualified business income (QBI) deduction (Sec 199A) does not apply to rental income from real property located outside the U.S. since QBI must be from the conduct of a trade or business within the United States.
Converting Foreign Currency Rental Profits to U.S. Dollars
Rev Ruling 75-90 provides the following method of converting rental profits or losses expressed in a foreign currency to profit or losses expressed in U.S. Dollars. The following worksheet follows that ruling:
| 1. Profit or loss before depreciation expressed in foreign currency | ______________ |
| 2. Enter the sum of transfers to the U.S during the year computed in foreign currency | ______________ |
| 3. Balance: Subtract Line 2 from Line 1 | ______________ |
4. Sum up the closing currency exchange rate(1) for each month of the year |
______________ |
| 5. Divide Line 4 by 12 (average exchange rate for the year) | ______________ |
| 6. Multiply Line 3 by Line 5 (unremitted profit or loss before depreciation in U.S. | ______________ |
| 7. Enter the transfers from Line 2 converted to U.S. Dollars at the time of transfer | ______________ |
8. Depreciation (expressed in U.S. dollars)(2) |
<____________> |
| 9. Profit or loss (expressed in U.S. dollars) | ______________ |
(1) The rate of exchange for foreign currency to U.S. Dollars
(2) The basis and depreciation would have been established in the year of purchase based upon the exchange rate in effect at the time of purchase, inheritance, or gift.
FBAR Reporting
If a foreign bank account is maintained to receive rental income and disperse rental expense payments, and the owner of the property has signature or other authority over the account, that account aggregated with other foreign accounts in which the taxpayer has signature or other authority may require an FBAR filing. On the other hand, if a property management firm handles all the financial transactions, then the rental would not fall under the FBAR reporting requirements.
W-8BEN
If the landlord hires a non-resident alien working in the foreign country to perform services related to foreign rental activity, there are no U.S. reporting or withholding requirements. However, the foreign person providing those services should complete Form W-8BEN and return it to the landlord as proof that the individual is not subject to U.S. taxation.
Form 8938 – Foreign Assets Reporting
The outright ownership of a rental property in a foreign country does not meet the definition of “Specified Foreign Financial Asset” (See Foreign Assets Reporting above).
However, if the taxpayer is an owner or partial owner in an entity that owns the rental activity, then it would be included when determining if Form 8938 must be filed.