Owning Foreign Property – A Guide for Americans Living Abroad

ByRandall Brody FATCA for Expats
Owning Foreign Property

Owning property abroad can be an exciting opportunity for many Americans living abroad. Some buy a home overseas to settle in a new country, while others see foreign real estate as an investment or a way to generate rental income.  However, U.S.  citizens must be aware of the tax implications that come with owning a foreign property.

The U.S. tax system follows a citizenship-based taxation model, which means you have to report your worldwide income and certain foreign assets, even if you live abroad full-time.
Understanding how the IRS treats foreign property is important if you want to avoid unexpected tax liabilities or penalties. While buying property overseas doesn’t immediately create a tax obligation, other financial activities, such as renting it out or selling it, may require additional reporting. This guide will break down everything you need to know about owning foreign property as a U.S. citizen, from tax implications to reporting obligations and strategies that can help you reduce your tax liability.

U.S. Tax Considerations When Purchasing Foreign Property

If you buy property overseas, you don’t need to report the purchase to the IRS. The IRS does not consider property ownership itself to be a taxable event. However, your financial arrangements, such as how you finance the purchase or whether you rent out the property, could affect your U.S. tax situation.

Many Americans who purchase property abroad need to open a foreign bank account to handle mortgage payments, maintenance expenses, and rental income. If the total balance in your foreign accounts reaches $10,000 at any point during the year, you will need to report it by filing an FBAR. Additionally, if your foreign financial assets exceed a certain threshold, starting at $200,000 for individuals living abroad, you may also need to file Form 8938 under FATCA.

Financing a Foreign Property

Many U.S. banks do not offer mortgages for foreign properties, so most buyers either pay in cash or secure a mortgage from a foreign lender. If you take out a foreign mortgage, you can deduct the interest payments on your U.S. tax return, just like you would with a U.S. mortgage. However, all amounts must be reported in U.S. dollars using the exchange rate from the transaction date.

It’s also important to understand local tax laws in the country where you’re buying property. Some countries impose high property transfer taxes, which can significantly increase your upfront costs. For example, Spain charges a property transfer tax that ranges from 6% to 10%, depending on the region.
Additionally, some countries require foreign buyers to purchase real estate through a corporate structure rather than owning it directly. This is common in Thailand, where foreigners cannot own land outright and typically buy property through a long-term lease or a Thai limited company.
If you set up a foreign corporation to hold the property, you may have additional reporting requirements with the IRS.  Before making a purchase, it’s best to consult a tax professional who understands both U.S. and foreign tax rules.

U.S. Taxation of Foreign Rental Income

If you own a rental property outside the U.S., you must report the income to the IRS just as you would for a rental property in the U.S. The IRS taxes worldwide income, meaning that any rent you receive from a foreign property must be included on your U.S. tax return, even if you don’t bring the money into the U.S. This rental income is generally reported on Schedule E (Supplemental Income and Loss) of Form 1040.

Threshold Requirements for Rental Income Reporting

The IRS has specific rules regarding when and how rental income from foreign property should be reported, depending on how much the property is used for personal purposes versus rental purposes. The tax treatment depends on how many days you rent out the property and how much you use it for personal purposes.

  • If the property is rented for fewer than 15 days per year, the income does not need to be reported, and you cannot deduct any rental expenses. The IRS considers this to be personal use.
  • If the property is rented for 15 or more days per year and personal use is fewer than 14 days (or 10% of the total days rented, whichever is greater), the IRS classifies it as a rental property. In this case, you must report all rental income, and you can deduct expenses related to the rental activity, including mortgage interest, property taxes, maintenance, and depreciation.
  • If the property is rented for 15 or more days per year but personal use exceeds 14 days (or 10% of the total rental days, whichever is greater), the property is classified as a mixed-use or vacation home. This means you can only deduct rental expenses up to the amount of rental income, and you must allocate the expenses between personal and rental use.

Deductible Expenses for Foreign Rental Property

Owners of foreign rental properties can deduct various expenses to reduce their taxable rental income when filing their U.S. tax return on Schedule E (Form 1040). These deductions help offset rental income, lowering the total amount subject to U.S. taxes. The deductible expenses include:

  • Mortgage interest
  • Property insurance
  • Management fees
  • Maintenance costs
  • Necessary repairs
  • Utilities
  • Advertising costs
  • Legal and professional fees
  • Travel expenses related to rental activity

One key difference between foreign and U.S. rental properties is that foreign property taxes are no longer deductible on your U.S. tax return. This change resulted from the Tax Cuts and Jobs Act of 2017, which eliminated the deduction for property taxes on foreign real estate.

Another significant difference is how depreciation is calculated. For U.S. residential rental properties, the IRS allows owners to depreciate the property over 27.5 years. However, for foreign rental properties, the IRS requires a 30-year depreciation schedule under the Alternative Depreciation System (ADS). This means U.S. taxpayers with foreign rental properties will have a slightly lower annual depreciation deduction compared to U.S. properties.

Foreign Tax Credits for Rental Income

Many foreign governments tax rental income earned within their borders, often at rates higher than those in the U.S. If you pay foreign taxes on your rental income, you may be able to claim the Foreign Tax Credit (FTC) on your U.S. tax return. This credit helps offset your U.S. tax liability, preventing double taxation on the same income. However, you must file Form 1116 to claim the credit.

Alternatively, some taxpayers may choose to deduct foreign taxes paid as an itemized deduction instead of taking the credit. The best option depends on your overall tax situation, but in most cases, claiming the Foreign Tax Credit provides a greater benefit.

Capital Gains Tax on Foreign Property Sales

Selling a foreign property is treated the same as selling a U.S. property for tax purposes. If you sell for a profit, the gain is subject to capital gains tax. The gain is calculated by subtracting the property’s cost basis (the purchase price plus any improvements) from the selling price. All amounts must be converted to U.S. dollars using the exchange rate from the date of the transaction.

If the foreign property was your primary residence, you may qualify for the home sale exclusion, which allows individuals to exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly). To qualify, you must have lived in the home for at least two out of the last five years before selling.

If you paid capital gains tax in the country where the property is located, you can offset some or all of the U.S. tax liability using the Foreign Tax Credit. However, foreign property sales do not qualify for the Foreign Earned Income Exclusion, which applies only to wages and self-employment income.

Reporting Requirements for U.S. Taxpayers with Foreign Property

Many Americans who own foreign property don’t realize that they have additional reporting requirements beyond their income tax return. If your foreign property involves bank accounts, corporate structures, or financial assets, you may have to file extra forms with the IRS.

FBAR Reporting (FinCEN Form 114)

If you have foreign financial accounts related to your property, such as a foreign bank account used to collect rent or pay expenses, you may need to file a Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is required if the total value of your foreign accounts exceeds $10,000 at any time during the year. Even if the account is used solely for managing rental income or paying a foreign mortgage, it must be reported.

FATCA Reporting (Form 8938)

The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with foreign financial assets exceeding certain thresholds to file Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return. This requirement may apply if you own foreign property through an entity or if the property generates income that is held in a foreign financial account.

Unlike the FBAR, FATCA has higher reporting thresholds, which depend on your filing status and residency:

  • Single taxpayers living abroad: $200,000 at year-end or $300,000 at any time during the year.
  • Married taxpayers filing jointly abroad: $400,000 at year-end or $600,000 at any time during the year.
  • U.S. residents: Lower thresholds apply—$50,000 at year-end or $75,000 at any time during the year for single filers.

Foreign Entity Reporting (Form 5471, 8865, or 3520)

If your foreign property is held through a corporation, partnership, or trust, you may have additional filing requirements with the IRS. These forms are complex and carry high penalties for noncompliance, so working with a tax professional is highly recommended.

  • Form 5471 (Foreign Corporations). You must file this if you own or control a foreign corporation. This situation is common in countries where foreigners buy real estate through corporate entities.
  • Form 8865 (Foreign Partnerships). You must file this if you hold property through a foreign partnership. This includes joint investments in real estate with a foreign co-owner.
  • Form 3520 & 3520-A (Foreign Trusts). If you own the property through a foreign trust or a fideicomiso , you may need to file Form 3520 and Form 3520-A. These forms report ownership and transactions with foreign trusts. 

Strategies to Reduce U.S. Tax Liability on Foreign Property

1. Claim the Foreign Tax Credit (FTC).  If you pay taxes on rental income or capital gains in another country, you can often claim a dollar-for-dollar credit on your U.S. tax return, reducing or eliminating double taxation.

2. Utilize a 1031 Like-Kind Exchange. This strategy allows you to defer capital gains taxes by reinvesting the proceeds from a property sale into another similar property. However, the exchange must be foreign property for foreign property. You cannot use this provision to swap a U.S. property for a foreign one.

3. Take Advantage of the Foreign Housing Exclusion.  Expats who use their foreign property as a primary residence may be able to exclude a portion of their housing costs from taxable income, provided they qualify for the Foreign Earned Income Exclusion (FEIE).

4. Consider Residency-Based Tax Planning.  Some Americans strategically purchase property in countries with territorial taxation, such as Panama and Belize, where only locally earned income is taxed. This can be beneficial for expats looking to optimize their tax situation and reduce their overall tax burden.

Common Pitfalls to Avoid When Owning Foreign Property

Many Americans underestimate the complexity of foreign tax laws. Some countries have strict ownership rules, inheritance taxes, or unexpected fees that make foreign property ownership more complicated than in the U.S. Another common mistake is failing to report rental income or foreign bank accounts, which can lead to severe IRS penalties.

Currency exchange rates also play a significant role in foreign property transactions. If the exchange rate fluctuates between when you buy and when you sell, your taxable gain in U.S. dollars may be higher than you expected. Keeping detailed records of all transactions and exchange rates can help you avoid surprises.

Owning Foreign Property Without the Hassle

Buying property abroad can be an exciting investment or a dream getaway, but it also comes with tax responsibilities you don’t want to overlook. While simply purchasing a property doesn’t trigger U.S. taxes, earning rental income, selling for a profit, or holding foreign financial accounts tied to the property all come with reporting obligations.

Fortunately, there are ways to minimize your U.S. tax burden, like claiming the Foreign Tax Credit, using the Foreign Housing Exclusion, or structuring your investment strategically.
If you’re planning to buy real estate overseas, working with a tax professional can save you a lot of trouble down the road. Contact us today for a consultation and ensure your investment stays tax-compliant and hassle-free.