There’s this question that I always get from my clients: “Do I have to report my real estate holdings in a foreign country?” To which, my answer (in true accountant style) is always: “It depends”. Let me explain further.
You may be a first generation immigrant to the US and still have strong ties to your home country; by way of family elders who live there or a strong sense that you would like to some day retire back there, where you grew up. Or you are an adventurous investor who would like to invest in a little vacation home by the beach in the Caribbean. Or you were stationed abroad through your job and loved it so much that you invested in some property there. Then this blog is for you to read!
The FATCA makes it mandatory for U.S. citizens, Green Card holders and foreign individuals with substantial presence in the US, to disclose all of their offshore holdings on their tax returns (via Form 8938), or on the FBAR, now known as Form FinCEN 114. Due to Inter-Governmental Agreements (aka IGAs), foreign financial institutions also disclose this information to the U.S. government.
Form 8938, Statement of Specified Foreign Assets, applies to foreign financial accounts, including stock in foreign companies and stakes in foreign business partnerships. So, what about your real estate holdings in foreign countries, do they have to go on these forms?
If your foreign real estate holdings were held directly by you, then it is NOT a specified asset that needs to be reported on Form 8938, for example, your personal residence or a rental property.
Please Do Not Stop Here! Read On!
A. If these real estate holdings were held by a foreign entity, such as a foreign corporation, partnership, estate or a trust, in which you have an interest, then ONLY the investment in this foreign entity must be reported on Form 8938, if the form thresholds are met.
The value of this interest would be determined by the fair market value of the real estate holdings.
If point # A applied to you, there are other reporting requirements in addition to Form 8938.
B. If the foreign property is in your name and is rented out, the rental income is to be reported on Schedule E of Form 1040. The allowable expenses are the same as if the rental property was in the US, however, the depreciation is taken straight-line over a period of 40 years instead of 27.5 years.
C. If the foreign property was inherited, if the inherited property was transferred to your personal name then it not a specified asset to be reported on Form 8938 unless the inheritance was an interest in a corporation, partnership or trust that held real estate.
D. If the foreign property in your personal name were to be sold, you will have to report short term or long term capital gains, as the case may be, via Schedule D to Form 1040 in the year the sale occurred. You may be eligible to get a foreign tax credit against your US taxes, if taxes were paid on the sale in the foreign country where the property was located.
E. If the foreign property was your personal residence, that is if you lived in the foreign property, 2 out of previous 5 years, immediately prior to the sale, you may be eligible for an exclusion on the sale- of $250,000 if filing as single or $500,000 if filing married & joint.
Agreed that owning property in a foreign country is not a walk in the park, but understanding the rules and regulations will keep you in compliance, and will make it manageable. Please make sure you completely understand your compliance requirements if any of the above apply to you. Better yet, consult an Enrolled Agent!
Original Post By: Manasa Nadig
Bibliography: Form 8938, Statement of Specified Foreign Financial Assets; Form 1040 & Schedules D & E; Internal Revenue Code § 121; Publication 946.
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