The term “global marketplace” has never been more descriptive-particularly when it comes to real estate. There are numerous reasons why many of our clients invest in property overseas, including asset protection, portfolio diversification, retirement planning, privacy, and tax savings. Real estate is not only a very stable investment in many foreign countries, it is also harder for U.S. creditors to attach than domestic property.
If you own real estate abroad, the tax forms and reporting requirements are dependent on your operation of the property and any foreign entities that may be used to hold title of the property.
If you own the foreign real estate directly as an individual, the U.S. income tax rules with respect to that property are almost the same as if the property were located in the USA. On your U.S. tax return you would depreciate the property and follow the same rules with respect to income and expenses as you would on property in the United States. Foreign property taxes are deductible, as are travel costs connected with managing investment properties overseas. You can also exclude up to $250,000 ($500,000 if married) in capital gains if you sell an overseas property that served as your primary residence for at least two out of the last five years.
If your foreign real estate is a rental property, the rental income and expenses must be reported on your Form 1040 using schedule E. In this case, your foreign rental property is basically treated the same way as domestic property, except that depreciation must be made over 40 years instead of the usual 271/2.
There are, however, special rules regarding the reporting of rental income from overseas real estate. You don’t have to report rental income if your property was rented out for less than 14 days during the year, or if it was used for personal reasons for more than 14 days or 10% of the days it was rented out. You can deduct mortgage interest, property taxes, and travel costs, but there is no deduction for rental expenses and losses.
Generally speaking, if you own real estate outside of the U.S., you’re more than likely to have one or more bank accounts in that country whether to pay expenses or possibly collect rent. This must be disclosed on Form 1040, Schedule B. If the foreign bank account(s) contains $10,000 or more on any given day of the calendar year you will need to file an FBAR (Form 114 Report of Foreign Bank Accounts) with the Financial Crimes Enforcement Network [FINCEN] annually before July 1. Failure to do so risks penalties beginning at $10,000 and potential criminal indictment.
If the property is held by a foreign corporation with 10% or more U.S. ownership, a foreign partnership or LLC, or a foreign trust or estate you will need to report that ownership on one of a number of IRS forms including Form 5471 (ownership inside a foreign corporation), and Form 8938 – Statement of Specified Foreign Financial Assets. These new filling requirements are a result of FATCA laws, with penalties beginning at $10,000 per incident. It’s important to note the reporting thresholds for FORM 8938. If your total foreign assets do not exceed those limits, you may not need to file for that year. In short, your individual circ*mstances will determine which reporting requirements and tax forms may be required.
Ownership in foreign real estate can be an important component of your overall investment strategy. If you already own property abroad or you are planning to invest in overseas property, it is imperative that you understand how the laws and regulations in other countries affect your U.S. taxes.
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Michael Anderson
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People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust.
That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust.
I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014.
I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high.
Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.
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