Do US Citizens/Americans Report Foreign Real Estate to IRS? (2024)

Reporting Foreign Real Estate to the IRS

It is very common for U.S. Persons who are foreign citizens or otherwise have foreign investments to have foreign real estate as part of their investment portfolio. Unfortunately, many foreign countries have different, and more complex rules and regulations when it comes to foreign real estate ownership and income generated from the properties — which makes reporting it to the IRS that much more difficult. For example, in some foreign countries real estate income is not taxed until certain income thresholds are met, and in other countries, deductions such as depreciation are not applicable. Let’s look at six (6) important U.S. tax implications of having foreign real estate:

Foreign Property Has US Tax & Reporting Implications

Even though the foreign property is located outside of the United States, U.S. persons who own property overseas may have certain U.S. tax and reporting requirements relating to the foreign property. Therefore, it is important for US persons to stay abreast of issues involving foreign real estate and U.S. tax, asset reporting, and gift tax consequences.

Foreign Rental Income is Reportable

When a foreign rental property generates income, that income is taxable in the United States. It does not matter if the income escapes taxation overseas. If the taxpayer already paid foreign tax on the income earned from the foreign rental property — they can typically claim a foreign tax credit using IRS Form 1116. Depending on what the tax rate is overseas, the Taxpayer may have more or less foreign tax credit than necessary. If they have excess foreign tax credits, they may be able to apply the credits in future years, but if they have insufficient foreign tax credits — the Taxpayer may have to pay additional US tax on the foreign income on their U.S. tax return.

*Also, even if after applying deductions and expenses the income generates a negative return, the income and expenses are still reportable on Schedule E.

Depreciation Foreign Real Estate in the U.S.

Foreign structures that are used for rental purposes can be depreciated in the United States. Most foreign rental property can be depreciated using a 30-year straight line (this was updated in 2018, in which it used to be 40 years). It is important to note that when the Taxpayer sells the home at a future date, the depreciation is factored into the adjusted basis calculation — and the benefits are lost. Therefore, the Taxpayer must consider their ultimate goals with respect to the foreign property and their own US status in future years — before claiming depreciation.

Selling Foreign Real Estate is Taxable (Capital Gains)

When a US person sells foreign real estate, that asset is taxable as capital gain — and the same holds true for a foreign rental property. Therefore, when a US person owns a foreign rental property and sells that property, the rental property must be included on the US tax return using Schedule D and applicable spot rates for currency exchange translations.

Foreign Real Estate & Expatriating From the US

When a person expatriates from the United States and is considered a covered expatriate, there may be a mark-to-market income tax consequence for the property (and other assets) — collectively referred to as exit tax. There are certain exceptions and exclusions as to the amount of capital gain that an expatriate can eliminate at the time of calculating the exit tax — and step-up-basis rules for foreign real estate may apply.

Overseas Real Estate Gift from a Foreign Person

When a US person receives a gift from a foreign person that includes foreign property, the foreign rental property value is a consideration when determining whether or not the taxpayer has met the threshold requirements of Form 3520 — which is used in part to report large gift transactions from non-US persons. Lately, the Internal Revenue Service has been on a penalty-issuing spree for US Persons who have not met the reporting requirements for Form 3520.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making aquiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring anexperiencedinternationaltax attorney to represent you forunreported foreign and offshore account reporting,it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who areBoard-Certified Tax Specialistsand who specializeexclusively in offshore disclosure and international tax amnesty reporting.

Golding & Golding: About Our International Tax Law Firm

Golding & Goldingspecializes exclusivelyin international tax, specificallyIRS offshore disclosure.

Contact our firm todayfor assistance.