Many Americans own property in the U.S. when they move abroad, and so are faced with the question of whether to sell or rent it.
How to answer this question often depends on whether they are moving abroad temporarily or permanently: if they are moving overseas temporarily, if may make more sense to rent it, while if they are moving abroad permanently, they may prefer to sell up and use the proceeds to buy a home abroad.
Other expats own one or more properties to rent in the U.S. as an investment.
While every expat’s situation is different, all however are subject to the same U.S. tax regime.
U.S. taxes for expats
Expats are still required to file a U.S. tax return, wherever in the world they live and earn. As such, rental income from U.S. properties (as well as from foreign properties) should be declared on form 1040.
Thankfully, there are several exemptions that allow U.S. expats to reduce their U.S. tax liability, notably the Foreign Earned Income Exclusion, and the Foreign Tax Credit, however rental income, not being earned, can’t be excluded using the Foreign Earned Income Exclusion.
U.S. expats may also have to report their foreign bank and investment accounts by filing an FBAR (Foreign Bank Account Report), if they have a total of at least $10,000 in foreign accounts at any time during the tax year.
How the U.S. taxes U.S. rental income
U.S. rental income for up to 3 residential rental properties should be declared on form 1040 schedule E.
Don’t forget to claim for all of your deductions related to the rented property, such as mortgage interest, advertising, real estate taxes, management, maintenance, utilities and insurance. It may also be useful to claim a percentage of the property’s value as depreciation by attaching form 4562.
It’s also worth remembering that many U.S. states charge income tax on income accrued in the state too, so that having U.S. property rental income may mean having to file a state tax return too, depending on the tax rules of the particular state.
How foreign countries tax U.S. rental income
The short answer to this is it depends on the tax rules of the foreign country where you live.
In particular, it normally depends on whether the foreign country where you live taxes residents on their worldwide income or just on their income sourced within that country.
As such we recommend that expats contact a trustworthy local accountant in their country of residence to ensure that they are complying with local ta laws.
Many expats aren’t aware that they are required to pay U.S. taxes, and when they find out, they may have several years of U.S. back taxes to file. Thankfully there is an IRS amnesty program called the Streamlined Procedure that lets expats catch up with their U.S. tax and FBAR filing without facing any penalties. They simply have to file their last 3 tax returns, and their last 6 FBARs (if required), pay any back taxes due (often none if they claim one or more of the available exemptions when they file their back taxes), and self-certify that their previous failure to file was non-willful.
“If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.” – the IRS