Reporting Foreign Rental Income
U.S. citizens and residents are subject to U.S. income taxation on their worldwide income. Therefore, if you own foreign rental real estate, you’re required to report your foreign rental income to the IRS and file a Schedule E as part of your Form 1040, as well as other forms.
All Rental Income Reportable
All rental income must be reported to the IRS. If the net income from your foreign rental real estate is negative, you’re still required to file Schedule E to report the rent received and deductions.
Foreign Tax Credit
You can claim a credit on your U.S. tax return for the income taxes paid to the foreign country where your foreign real estate is located. As a result, your U.S. income tax on your foreign rental income is reduced by the amount of foreign income tax paid on your foreign rental income. If your foreign real estate is located in a country with tax rates higher than the tax rates in the U.S., you should generally not owe any additional U.S. income tax on your foreign rental income. However, if the foreign income tax exceeds the amount you would have owed to the IRS had the property been located in the U.S., it cannot be used to offset the tax on your other income. You can generally carry the excess foreign tax credit forward to the following tax year.
Other Reporting Requirements
In addition to filing Schedule E, you may be required to file other forms to report your foreign rental real estate. For example, if you receive your foreign rental income in a foreign financial account, you may be required to file FinCEN Form 114 (“Foreign Bank Account Report” or “FBAR”). Please be aware there are substantial penalties for not filing or filing an incomplete FBAR.
If you do not own your foreign rental real estate directly, but instead through a foreign legal entity, such as a foreign corporation or foreign partnership, you may be required to file Form 8865 or Form 5471 as part of your Form 1040. Foreign rental real estate may also trigger a Form 8858 filing requirement.
If you own foreign rental real estate, please contact us. We specialize in preparing U.S. tax returns for U.S. taxpayers with foreign income and assets. We have offices in Denver CO, as well as in Germany, Switzerland and the Netherlands.