As a U.S. tax resident, you are taxed on your worldwide income. This means any income generated from foreign real estate—whether rental income, capital gains from a sale, or other earnings—is subject to U.S. taxation under the IRC. Here’s how it typically works:
Rental income from foreign property is treated much like domestic rental income — reported on Schedule E of Form 1040, with property management fees, repairs, depreciation, and mortgage interest deductible. Depreciation, however, is slower: IRC §168(g) forces foreign real property onto the Alternative Depreciation System (ADS) — 30-year straight-line for residential property, 40-year for nonresidential — rather than the 27.5-year schedule U.S. residential property enjoys. Foreign rental income also does not qualify for the QBI deduction, which is limited to a trade or business conducted within the United States.
The country where the property is located may also tax your rental income. Tax rates, deductions, and filing requirements vary significantly by jurisdiction.
When you sell foreign real estate, any gain is subject to U.S. capital gains tax. Long-term gains (property held for more than one year) are taxed at preferential rates (up to 20% for high-income earners, plus the 3.8% NIIT under IRC §1411).
Many countries impose capital gains taxes on the sale of real estate. Some countries offer exemptions or reduced rates for long-term ownership or primary residences.
To avoid double taxation, you can claim a foreign tax credit (FTC) under IRC §901for taxes paid to the foreign country. However, the credit is limited to the U.S. tax liability on the same income. Excess foreign taxes may be carried forward for up to 10 years or back for one year.
Some countries impose inheritance or estate taxes on foreign-owned property. For example, France levies inheritance tax on real estate, even for non-residents.
Fluctuations in exchange rates can impact your returns. Consider hedging strategies to mitigate this risk.