Reporting Foreign Rental Income on US Taxes

Must You Report Foreign Rental Income on US Taxes?

Yes. If you are a US citizen, green card holder, or resident alien (including most visa holders who pass the Substantial Presence Test), you must report your worldwide income - including rental income from property located outside the United States.

Foreign rental income is reported on Schedule E (Supplemental Income and Loss), attached to your Form 1040. There is no exemption for rental income simply because the property is located in another country.

How to Convert Foreign Rental Income to US Dollars

All amounts on your US return must be in US dollars. For rental income paid in foreign currency, you must convert using an acceptable exchange rate:

• Yearly average rate: Acceptable for income received throughout the year. The IRS and US Treasury publish annual average rates.
• Spot rate on receipt date: Use the exchange rate on the date you actually received or constructively received each payment.

Keep records of the exchange rates you used for each income and expense item. Inconsistency across your return can raise questions during an audit.

Deductible Expenses for Foreign Rental Property

Just as with US rental property, you can deduct ordinary and necessary expenses to manage and maintain the foreign property. Deductible expenses include:

• Mortgage interest: Must be on a loan secured by the property
• Property taxes: Deductible as a rental expense (not on Schedule A for foreign property)
• Repairs and maintenance: Not capital improvements
• Property management fees: Fees paid to local agents or managers
• Insurance premiums: Landlord or property insurance
• Advertising and tenant screening: Vacancy-related costs
• Travel to inspect property: Subject to limitations; must be primary purpose of trip

All expenses must be converted to US dollars at the applicable exchange rate.

Depreciation of Foreign Rental Property

You must also deduct depreciation on the foreign property each year it is rented. Foreign residential rental property is depreciated over 40 years (compared to 27.5 years for US property). This is required whether or not you claim it - and if you do not claim depreciation when you should have, the IRS will still calculate depreciation recapture when you sell the property.

To calculate depreciation, you need the cost basis of the building (not the land), converted to US dollars at the exchange rate when you placed the property in service.

Foreign Tax Credit

If you paid income tax on the rental income in your home country, you may be able to claim the Foreign Tax Credit (Form 1116). This credit reduces your US tax liability by the amount of foreign tax paid on the same income, preventing double taxation.

The credit is limited to the US tax attributable to the foreign rental income. If the foreign tax rate is higher than your US rate, you may not be able to use the full credit in the current year, but unused credits can be carried forward up to 10 years.

FBAR and FATCA Considerations

Rental income itself does not trigger FBAR or FATCA, but the accounts you use to collect rent might. If the foreign bank account where you receive rent payments exceeds:

• $10,000 in aggregate at any point during the year: File FBAR (FinCEN 114)
• $50,000 at year-end (single filers): File Form 8938 (FATCA)

The foreign property itself is generally not a foreign financial asset for Form 8938 purposes, so you do not report real estate on that form.

Passive Activity Rules

Rental income is generally treated as passive activity. Losses from rental properties can only offset other passive income, not your wages or active business income - unless you qualify as a real estate professional or your adjusted gross income is under $100,000 (in which case up to $25,000 in rental losses may be deductible).

These passive loss rules apply to both US and foreign rental properties.

Get Your Personalized Filing Checklist

Foreign rental situations vary based on the country, the property type, and how the rental is structured. Start the free 5-minute diagnostic to get a personalized list of the forms and schedules you need to file.