How to Claim US Tax Deductions on Foreign Real Estate

Many Americans are looking abroad for vacation homes, rental properties and places to settle down during their retirement, whether that’s two years from now or 20 years from now. Financing and buy foreign real estate is different than in the United States. Local customs and ownership rules in some countries also make it more difficult to own property as a non-resident. But the tax benefits of owning real estate abroad are similar to those of owning it in the US, with a few exceptions.

Key Takeaways

• The tax treatment of homes is the same regardless of whether the home is located in the US or another country.
• Generally, you can deduct mortgage interest and mortgage points up to $750,000 ($375,000 if filing separately) of secured mortgage debt.
• To claim the deductions, you must itemize on Schedule A when filing your tax return.
• If you receive rental income, the tax rules depend on the number of days you use the property for personal use rather than rental.
• The foreign property tax deduction was eliminated from U.S. tax returns in 2017.

Overview of favorable tax treatment

The foreign property tax benefits you receive under U.S. tax law depend on how you use the foreign property. For example:

• If you live in the home, you can in principle claim the mortgage interest deduction and deduct mortgage points.
• If you receive rental income from the home, you can deduct the ‘ordinary and necessary costs for the management, maintenance and maintenance’ of the home. These costs include mortgage interest, liability and property insurancerepair and maintenance costs, and local and long-distance travel costs associated with the maintenance of the property.

Foreign property for personal use

Mortgage interest deduction

If you use the house as a second home and not as a rental property, you can deduct it mortgage interest And mortgage discount points just as you would for a second home in the US

You can deduct the interest you pay on the first $750,000 ($375,000 if you’re married and filing separately) of qualified mortgage debt on your first and second homes. That is the total amount for both properties together. If you purchased your property before December 16, 2017, you will receive the previous deduction limit of $1 million ($500,000 if married separately) of qualified mortgage debt. Contact a tax professional to be sure what applies.

As with a primary residence, you can’t write off expenses like utilities, maintenance or insurance unless you qualify for the home office deduction.

Foreign property taxes

While the mortgage interest deduction is the same whether the home is in the U.S. or abroad, property taxes work differently. Foreign property taxes are not deductible for the tax years 2018 to 2025.

The interest deduction on the first $750,000 ($375,000 if married filing separately) of mortgage debt on a first or second home is the caps through tax year 2025. Unless Congress passes new legislation, the cap will rise again to $1 million ($500,000 for individual submitters).

Foreign rental properties

The tax rules are more complicated if you earn rental income from the foreign property. Different rules apply depending on the number of days you use the property for personal use rather than rental. You generally fall into one of two categories: personal residence and rental properties.

Personal residence

You rent the property for 14 days or less and use it for more than 14 days or 10% of the total number of days the property was rented, whichever is longer.

You can rent the house to someone else for a maximum of two weeks (14 nights) per year without having to pass on that income to the Internal Revenue Service (IRS). Even if you rent it out for $5,000 per night, you don’t have to report the rental income as long as you didn’t rent for more than 14 days.

The home is considered an owner-occupied home, which means you can deduct mortgage interest in accordance with the regular second home rules. However, you cannot deduct rental losses or expenses.

Rental property

You rent the property for longer than 14 days and use it less than 14 days or 10% of the total number of days the property was rented, whichever is longer. In this case, the IRS considers the property a rental property and considers the rental activity a business. Therefore, you must report all rental income to the IRS.

Still, the good news is that this allows you to deduct rental costs, such as mortgage interest and advertising costs. insurance premiumsutilities, and property manager reimbursements. You must divide costs between rental and personal use based on the number of days the property is used for each purpose.

Please note that if a member of your family uses the home (for example, your spouse, siblings, parents, grandparents, children and grandchildren), the use counts as personal days unless you provide a fair rental price incl.

Note that foreign properties are written off more than 30 years, instead of the current 27.5 years for homes. In both cases you can only depreciate the value of the building; the land is not depreciable.

Capital gains on foreign home sales

If you sell your foreign home, the tax treatment is similar to that for selling a home in the US

If you have lived in and owned the home for at least two years in the past five years, it is considered your principal residence. You can exclude up to $250,000 of capital gains (or up to $500,000 for married taxpayers) from the sale.

This exclusion from the sale of a private home does not apply if the home was not your principal residence. In that case you owe the usual amount capital gains tax on the entire profit.

Please note that the profit counts as a source of foreign income and is therefore eligible for the foreign tax credit. However, it is not considered foreign earned income, so you cannot claim the exclusion of foreign income from employment.

1031 Exchanges

If you are selling your foreign property, you may be able to do a 1031 exchange (also called a similar exchange), where you exchange an investment property for another similar property with tax deferral. Many investors use this strategy to delay payment of capital gains depreciation get taxes back.

However, real estate in the US is not considered equivalent to real estate abroad. US Internal Tax Code Section 1031 allows only domestic-to-domestic and foreign-to-foreign exchanges.

The US considers any property outside the US to be comparable to any other comparable property outside the US. So it is possible to exchange a house in Panama for another house in Panama – or in Ecuador or any country in Europe, for that matter. . It’s just not considered the same as American real estate.

To report a like-kind exchange under Section 1031, taxpayers must use IRS Form 8824.

Tax return for foreign real estate

Please note that you may need to file US tax forms depending on your exact situation as a foreign property owner.

For example, if you rent your home abroad and open a bank account to collect rent, you will need to submit a Report of Foreign Bank and Financial Accounts form if the total value of all your foreign accounts is €10,000 or more’ on any moment during the calendar year.”

Other forms include Form 5471: Return of Information from U.S. Persons Regarding Certain Foreign Corporations (if your property is owned by a foreign corporation) and Form 8858: Return of Information from U.S. Persons Regarding Foreign Disregarded Entities and foreign branches (if your property is owned by a foreigner.) limited liability company).

Avoid double taxation

If you operate your home abroad as a rental property, you may owe tax in the country where the home is located. To prevent double taxationyou can have a tax credit on your US tax return for any taxes you paid abroad on the net rental income.

However, there is a maximum permitted tax credit. You cannot credit more than your US tax on the rental income after deducting the costs.

In addition to a tax credit for any rental tax paid, you can also claim a foreign tax credit if you sell the property and pay capital gains tax abroad.

Can I deduct mortgage interest on my foreign home?

Yes. The same rules apply whether the home is in the US or abroad. You can deduct the mortgage interest on the first € 750,000 (€ 375,000 if you file separately) of mortgage debt on your first or second home. The debt must be used to purchase, build, or substantially improve a home, and that home must secure the debt.

To claim the deduction, you must provide a specification Schedule A Form 1040 or 1040-SR. You cannot take the deduction if you claim the standard deduction.

Can I deduct foreign property taxes?

No. Foreign property taxes have no longer been deductible since 2017. The deduction may or may not be refundable after the 2025 tax year, depending on congressional action.

Will I owe capital gains on the sale of my foreign property?

Maybe. The same rules apply whether the property is in the US or abroad. If you have lived in and owned the home for at least two of the past five years, you can exclude a maximum of $250,000 in gain. Profits above these thresholds are taxed at the rate short or long term capital gains tax rate, depending on how long you owned the home.

Generally, you don’t qualify for the exclusion if you excluded gain from another home sale within the past two years.

Can foreign real estate be depreciated?

Yes. If your home is classified as a rental property, you can write it off on your income tax return. Unlike American real estate, which depreciates over 27.5 years, foreign properties depreciate over 30 years. You can only depreciate the value of the building. Land can never be depreciated because it is not used up.

The bottom line

Foreign ownership and tax laws are complex and change from time to time. You can protect yourself by consulting with a tax accountant, a real estate attorney, or both, in the U.S. or abroad.

When buying abroad, pay extra attention to the planning and details. Many countries have rules and rules about who can own property and how it can be used.

In the US, home buyers receive property rights. In other countries this distinction is not so clear. So, if you buy a house abroadMake sure the transaction is conducted in a manner that protects your property rights.