How to Report Foreign Rental Income When You File Taxes

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Today, I’m explaining why and how to report foreign rental income when you file US taxes. 

Report_Foreign_rental_income_taxes

In this post, I’ll address the following as it relates to foreign rental income

      • Why do you need to report the income
      • Who should be reporting it?
      • What else should be included in the filing
      • Reporting currency on the income
      • Other reporting requirements
      • Penalty for not reporting the income

The question I constantly get, especially from folks on work visas, or in the US on temporary status is;  “If I’m not a permanent resident in the US or a citizen, do I have to report my foreign rental income, and if so why?”

It comes as a surprise when I explain that foreign rental income needs to be reported to the IRS, regardless of whether it’s been taxed in that foreign country or not.

Owning properties overseas is more common than most people imagine.

Most of the folks on temporary status are still operating between the US and the home country financially, so they have invested in assets like rental properties overseas to hedge their investment risks.

It makes sense when they don’t know if they are going to be in the US permanently.

Other cases arise from US citizens investing in foreign properties for varied reasons. Others are simply from US residents inheriting property overseas.

Worldwide Income Taxation – Includes Foreign Rental Income

As detailed in this post:-  the US taxes tax residents on worldwide income. This includes rental income regardless of where it’s earned.

The tax resident status applies to US citizens, green card holders, or immigrants on different visas who have passed the substantial presence test. Where they reside is irrelevant.
 

Keep in mind that it does not matter when you become a tax resident, as soon as you qualify, all your worldwide income comes under the jurisdiction of the IRS.

One of the trickier aspects is when you are a dual-status tax resident. This means that you pay taxes as a tax nonresident for part of the year and the other half as a tax resident.

If you have foreign rental income during the resident part of the year, you’ll need to report your rental income.

The only time you can safely exclude foreign rental income is when you are filing taxes as tax nonresident for the whole year.

Reporting the Foreign Rental Income When You File Taxes

Another question I frequently get is, “What if I made zero profit on the property, do I still need to report it?”  The simple answer is yes.

If you are reporting the foreign rental income, you should also include rental expenses.  Examples of these are

    • Property taxes (foreign),
    • Tax on the earnings (Foreign),
    • Foreign mortgage interest,
    • Maintenance expenses,
    • Management expenses etc.

Include any expenses involved in generating the rental income on your foreign property.

There is a genuine fear of being double taxed, but this is mitigated by being able to apply for the foreign tax credit. So, the simple answer is to report all the income, and all the expenses. 

There are a few other complexities involved, so it’s important to work with a qualified CPA on this aspect of reporting.

How you report the income will depend on the ownership structure. There are various ways of owning property. Some examples include individual ownership, a foreign LLC (Limited Liability Company), a US LLC, a foreign trust amongst others. Each has its pros and cons – A post for another day.

If you are not sure about the best structure for your property, it’s best to work with an international CPA and/or tax attorney. We are happy to introduce you to some of these professionals in our network.

Reporting Currency for the Foreign Rental Income

Report all income and expenses in US dollars. According to the directions provided by IRS (1), if the foreign country does not use the US dollar, use the local currency, but be sure to make the exchange at the end of the year when you report it.

Other Reporting Requirements

Depending on how you are running the rental property, and what else you own overseas, there are other reporting requirements you might need to fulfill. The two main ones are

FBAR (Foreign Bank and Financial Accounts Reporting) If you’ve set up a foreign account, to receive the rental income, you may have to file the FBAR forms. The requirement is based on the combined balances of all your foreign accounts.

FATCA (Foreign Account Tax Compliance Act) Form 8938 (2). This form is required if specified foreign financial assets’ aggregate value is more than the reporting threshold at any point during the year.

IRS has created a simple chart that compares Form 8938 and the FBAR requirements and will help you figure out which one of the two if any you need to file (3) 

There are a few other requirements, but the two above are the main ones.

Penalty For Not Reporting Foreign Rental Income

Failure to report foreign income can have serious financial consequences for you. There is the usual penalty for not reporting income, and then there are penalties for failure to report on foreign assets.

One of the reasons US tax residents are not reporting foreign rental income is simply because they don’t know they are supposed to report it. This is especially true with those who are recently arrived in the country.

It’s important to figure out as quickly as possible how to file taxes in the US, especially the first year when new in the country.

If you are one of the folks that have not reported your foreign rental income for whatever reason, it’s not too late to correct the issue.

The IRS continues to offer a voluntary program that will allow you to disclose previously unreported foreign earned income, including foreign rental income (4)

The program offers reduced penalties and in a lot of cases may waive the penalties. 

As you contemplate filing your taxes this year, remember to include everything. We are happy to introduce you to some of the professionals in our network if you need help with the taxes.


If you’d like to chat about financial issues that affect foreign-born families in the US, we are thrilled to chat with you

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Sources


(1) https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates

(2) https://www.irs.gov/businesses/corporations/do-i-need-to-file-form-8938-statement-of-specified-foreign-financial-assets

(3) https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

       (4) https://www.irs.gov/individuals/international-taxpayers/options-available-for-us-taxpayers-with-undisclosed-foreign-financial-assets

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, investment advisory services, or legal advice. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jane Mepham and all rights are reserved. Read the full disclaimer here.

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