Plan for Tax Issues If You Buy Foreign Real Estate

Our economy is becoming even more global. Businesses source from outside the US and sell outside the US. Investments are made the world around.

And more and more of my clients are investing in real estate investments outside the US. In today’s blog, we’re going to look at how taxes work if you have a foreign real estate investment property.?

Rental Income is Taxable

The rental income you earn may be taxable in the foreign country in which it is located. Additionally, as a US taxpayer, the income will be taxable in the US. However, you’ll receive a tax credit for the tax you’ve paid in the foreign country. You won’t pay tax twice, but you may have more tax than if the property was located in the US. It has to do with tax rates and what’s deductible in the foreign country.

For US taxes, you don’t have to report rental income if (1) your property was rented out for less than 14 days during the year, or (2) you used the residence for personal reasons for the greater of 14 days or 10% of the days it was rented out.?

If you do have rental income, you can also take a deduction for rental expenses which include repairs, utilities, association fees, property tax and the like. Also if you have foreign travel to supervise and maintain the property, that’s deductible.

Real estate depreciation must be calculated using 30 years for residential and 40 years for non-residential property.

Type of Business Structure

I received a question about this and that’s what prompted this blog. In this case, the USTaxAid community member was buying a property offshore to be used as a rental property. The question was what was the best business structure for a US taxpayer to use to hold offshore real estate.?

The answer was, “It depends.”

In this case, it has to do with the type of structure that is used in the foreign country. We use business entities in the US for asset protection. There isn’t any tax advantage in the US for real estate investments. In most countries, asset protection isn’t nearly the issue that it is in the US. Other countries simply aren’t as litigious.

If you do decide to have a business structure like a foreign LLC, you’re going to face fees and additional filing requirements. Let’s look at that next.?

US Tax Filing Requirements for Foreign Real Estate

If you have a foreign bank account and the account (or in aggregate with other accounts that you own or if you sign on other foreign accounts) reaches $10,000 at any point in the year, you will need to file FinCen114. This is also known as a FBAR report and is filed online directly with the Financial Crimes Enforcement division of the US Treasury.?

You also need to disclose that you have a foreign bank account on your Form 1040, Individual Income Tax Return.

If your property is held inside a foreign corporation, you must file Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations.

If your property is held in a Foreign LLC, you will need to file Form 8858, Information Return of US Persons with Respect to Foreign Disregarded Entities.

If your property is held in an international trust, foundation or certain other foreign entities, you may need to also file Form 3520-A, Annual Information Return of Foreign Trust and/or Form 3520, Annual Return to Report Transactions With Foreign Trusts.?

And finally, in some cases you may need to also file Form 8938, Statement of Foreign Financial Assets. This applies if you have significant foreign assets.

What’s Next

Tax planning gets especially complicated when you hold real estate outside the US. Don’t rely on social media and free advice. This is when you need to have experienced CPAs or tax attorneys advising you. The rules are rapidly changing and the penalties are huge if you get it wrong.

Contact us ?to see if we can help you with your tax planning.?https://www.ustaxaid.com/contact/