Owning Foreign Real Estate and US Expat Taxes: A Guide

Many Americans overseas buy homes to live in, or real estate to rent out or as an investment. US expats must report their global income and some types of foreign assets to the US government though, even while living abroad, and many wonder what are the reporting and tax implications of owning foreign real estate.

In this brief guide, we’ll provide a breakdown of what expats need to know about foreign real estate and US taxes.

• Do US expats pay tax on foreign property?
• Buying property abroad
• Renting out foreign property
• Selling foreign property
• Why a Foreign Exchange Gain Can Occur
• Example: Paying Down a Euro Mortgage
• More reporting related to foreign real estate ownership
• Should expats use a US or foreign LLC to hold foreign real estate?
• Common mistakes to avoid
• Should American expats own foreign real estate?

Let’s get started.

Do US expats pay tax on foreign property?

Yes and no! All US citizens, including Americans living abroad have to file US taxes every year, reporting their worldwide income. This includes income or gains derived from or related to owning foreign real estate. Let’s break it down by the different stages and types of property ownership.

Buying property abroad

You don’t need to report a foreign real estate purchase to the IRS unless you buy it through a foreign entity (like a company or trust). If you buy it personally, no IRS filing is required at the time of purchase.

Still, you should keep good records of the purchase and other capital expenses, as you’ll need them later to calculate capital gains and depreciation.

If you buy foreign property through a foreign corporation or partnership, seek advice from an expat tax specialist ideally first, as additional IRS forms (such as form 5471 and/or form 8865), reporting and taxes may apply.

Renting out foreign property

If you receive rental income from foreign (or US) real estate, you must report it on your federal tax return.

You should report rental income and expenses on Form 1040 Schedule E. You can deduct local property taxes, repairs, mortgage interest, and depreciation.

Note that depreciation rules differ compared to US real estate, as foreign residential property depreciates over 30 years instead of 27.5 years.

If you pay foreign tax on your rental income, you can claim the US Foreign Tax Credit on Form 1116 to avoid double taxation. Note however that income from rental property is considered passive income and so can’t be claimed under the Foreign Earned Income Exclusion.

Selling foreign property

Selling property abroad may mean paying US capital gains tax if you make a profit on the sale, even if you reinvest the gain or spend it abroad.

Use your original purchase price, plus any improvements, to calculate your gain. Subtract selling costs like legal fees or real estate agent commissions.

You may qualify for the Section 121 Exclusion if the property was your primary residence. You can exclude up to $250,000 ($500,000 for married joint filers) in gains if:

• You owned the property for at least 2 of the last 5 years, and
• You lived in it for at least 2 of the last 5 years

You can offset foreign taxes paid on property capital gains by claiming the Foreign Tax Credit.

Why a Foreign Exchange Gain Can Occur

When you borrow in a foreign currency (e.g., euros), you’re effectively entering a foreign currency contract. The IRS views the repayment of that debt as a potential realization event.

If the U.S. dollar strengthens between the time you take out the loan and when you pay it back, you need fewer USD to pay off the same amount of foreign currency—this creates a realized FX gain in USD terms.

Example: Paying Down a Euro Mortgage

• You take out a €100,000 mortgage when €1 = $1.20, so it’s equivalent to $120,000.
  
• Later, the exchange rate is €1 = $1.05, and you decide to pay off the loan.
  
• You only need $105,000 to pay off the remaining €100,000.
  
• You “saved” $15,000 due to FX change.
  

That $15,000 is considered a foreign exchange gain and is taxable as ordinary income under IRC §988.

More reporting related to foreign real estate ownership

The IRS doesn’t require direct reporting of personally owned real estate. However, if the property is held through a foreign entity, multiple reporting forms may apply.

Here’s what to consider:

1. FBAR (FinCEN Form 114)

Do you hold rental income or property proceeds in a foreign bank account? If the total value of the balances of all your foreign accounts (including bank and investment accounts) exceeds $10,000 at any time during the year, you must file an FBAR using FinCEN Form 114. This form goes to the Treasury Department, not the IRS, but the penalties for missing it are steep, up to $10,000 for even innocent non-filing. 

Note that if you transfer the funds to buy a foreign property  to a foreign bank account even momentarily before a purchase, this can trigger an FBAR filing requirement.

2. Form 8938 (FATCA reporting)

If your foreign financial assets exceed certain thresholds, under the Foreign Account Tax Compliance Act (FATCA) you must report them using Form 8938, attached to your tax return.

This includes foreign bank accounts and interests in foreign entities that own real estate, but not real estate owned directly in your name.

The minimum FATCA reporting thresholds are as follows:

• $200,000 (single filers living abroad) – doubled for joint filers
• $300,000 (single filers at any point during the year) – doubled for joint filers

3. Form 5471 or Form 8865

If you own the property through a foreign corporation or partnership, you may need to report your ownership stake and provide detailed financials.

These forms are complex and time-consuming. Work with an expat tax specialist if they apply to you.

Should expats use a US or foreign LLC to hold foreign real estate?

A US LLC offers limited liability and simple US tax reporting, but owning foreign real estate through a US entity may trigger local tax issues abroad.

Some countries treat US LLCs as corporations. That could mean higher local tax or added reporting. Always seek advice from both a US expat tax specialist and a local tax professional before considering owning foreign property through a company.

Many expats are advised by foreign realtors or foreign tax advisors to set up foreign corporations or LLCs to hold property. This can offer local legal or tax benefits, but it complicates US tax filings.

A foreign company creates new obligations:

• CFC rules: Owning 10% or more of a foreign corporation triggers reporting requirements.
• GILTI tax: US persons may owe tax on a foreign company’s income, even without profit distribution.
• Form 5471: Required for US owners of foreign corporations.
• Form 8865: Applies to US owners of foreign partnerships.
• Form 8938: Used to report large foreign financial assets (FATCA), including interests in foreign entities.

You may owe US tax on the company’s income, even if the company doesn’t distribute profits to you.

If you’re thinking about buying property through a foreign company, always consult a US expat tax expert first, as there may be US tax complications, and the IRS looks closely at these structures.

Common mistakes to avoid

1. Ignoring reporting small foreign rental income to the IRS 

Even a few hundred dollars must be reported. The IRS doesn’t care where the money sits or how it’s used.

2. Missing FBAR and FATCA filings

Many expats forget to file FBAR or Form 8938. These forms don’t generate tax, but missing them can lead to big fines.

3. Choosing the wrong ownership structure for foreign property

Using a foreign entity without understanding US reporting rules is risky. It often costs more in compliance than it saves, and can trigger additional taxes.

4. Overlooking capital gains Tax when selling foreign property

Selling a foreign home can come with unexpected US tax. Plan ahead to use exclusions or tax credits.

Should American expats own foreign real estate?

Owning real estate abroad offers expats flexibility, potential income, investment diversification, and often a home in the country where you’ve chosen to live. However, it’s important to understand the US tax requirements related to owning foreign property.

Consult a cross-border tax advisor who is experienced in both US and international tax laws relating to foreign real estate before purchasing property overseas. With the right planning and guidance, you can avoid potential pitfalls and make the most of your foreign property investment while staying IRS-compliant.