Dreaming of buying a holiday home or investment property overseas? If you’re based in the US, understanding your tax obligations is just as important as choosing the right property.
There’s no question about it: buying a property overseas is an exciting venture. But for US taxpayers, it comes with more than just daydreams of lazy beach days and lucrative rental returns. The IRS keeps a close eye on your overseas finances – and owning foreign property comes with certain tax liabilities. So, to avoid unexpected costs and penalties, here’s what you need to consider:
1. Rental income is taxable – even overseas
Let’s say you buy a seaside apartment in Portugal or a ski chalet in France and rent it out while you’re not using it. Any rental income you earn is taxable in the US and must be reported to the IRS – even if you’re paying tax on it locally too.
The Foreign Earned Income Exclusion (FEIE), which can help US taxpayers reduce their tax bill, doesn’t apply to passive income like rent.
You’ll need to report your gross rental income and associated expenses on Schedule E (Form 1040).
2. Know your reporting obligations: FBAR and FATCA
Even if your property itself doesn’t need to be reported on either the FBAR or FATCA Form 8938, the accounts connected to it might.
If your foreign financial accounts collectively exceed $10,000 at any point during the year, you’ll need to file a Foreign Bank Account Report (FBAR).
You may also have to file FATCA Form 8938, which applies if your total foreign financial assets exceed certain thresholds (starting at $50,000 for single filers). The rules differ slightly depending on whether you’re living in the US or overseas.
3. Depreciation rules differ for overseas property
In the US, residential rental property is depreciated over 27.5 years. For foreign property, it’s 30 years.
That difference might sound minor, but it affects how much of your property’s cost you can deduct each year – and it could influence your capital gains bill later when you sell.
4. You may be eligible for foreign tax credits
If you pay tax on rental income in the country where your property is located, you might be able to offset it by claiming a foreign tax credit on your US return (Form 1116).
This can help prevent double taxation – but only if you have accurate records and understand how each country’s rules apply.
Different countries vary widely in how they treat deductions and expenses, so always check with a cross-border tax advisor.
Tax planning is key to keeping your overseas dream on track
5. Capital gains tax still applies – even overseas
If you sell your overseas home, you’ll owe US capital gains tax on any profit, regardless of where the property is located.
The exchange rate can make a big difference. Gains are calculated in US dollars, so if the local currency strengthens against the dollar, your taxable gain might be larger than expected.
6. Buying through a foreign company or trust
Some buyers set up a foreign company or trust to purchase property, often for inheritance or tax planning reasons.
But this can trigger complex US tax rules around Controlled Foreign Corporations (CFCs) or Passive Foreign Investment Companies (PFICs), which involve extra reporting, higher tax rates and potential loss of capital gains treatment.
Forms such as 5471, 8621 or additional FATCA disclosures may be required. Missing these can lead to hefty penalties.
7. Your estate and gift tax obligations include overseas homes
As a US taxpayer, your estate includes worldwide assets, including any property you own overseas.
If you gift the property, or pass it on as part of your estate, it may be subject to US estate or gift tax.
You may also face inheritance or estate taxes in the country where the property is located, so it’s vital to plan ahead.
8. Giving up your green card or US citizenship
If you become a “covered expatriate” under US tax law, any appreciated overseas property may count toward your exit tax.
This is a one-time capital gains tax on your total assets, calculated as if you sold everything the day before you renounced.
9. Foreign mortgage interest may be deductible
You can deduct mortgage interest on a foreign property, but only if it qualifies as a primary or secondary residence and meets certain IRS requirements.
The loan must be secured by the property itself, and the total mortgage amount is subject to limits (currently $750,000 for new loans).
Since foreign banks don’t issue the same tax documents as US lenders, you’ll need to keep thorough records of all payments and agreements to claim this deduction.
Summary
Buying a home overseas is a great lifestyle or investment choice, but if you live in the US, taxes don’t stop at the border. With strict IRS rules and reporting requirements, tax planning is key to avoiding unexpected costs and penalties and keeping your overseas dream on track.
Email us at [email protected] or give us a call on 0808 252 7870 and one of our friendly advisers will connect you with a reputable tax specialist in the area you’re buying.
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