Owning a rental property abroad means you’ll need to report all rental income to the IRS, no matter where the property is located or where you pay taxes. This guide explains how the IRS treats foreign rental income, what deductions you can take, how to handle depreciation, and what happens when you eventually sell.
Do U.S. Expats Need to Report Foreign Rental Income?
Yes. As a U.S. expat, you’re taxed on worldwide income, which includes any rental income from properties outside the United States. You’ll typically use Schedule E to report the income, expenses, and depreciation. Even if you pay local taxes on your rental earnings, you must still file with the IRS.
Key points:
- Worldwide income: If you’re a U.S. citizen, everything you earn—including foreign rental income—must be reported.
- Schedule E: The place to list rental income, expenses, and depreciation on your U.S. tax return.
- Foreign tax credit: If you pay taxes to another country, you may reduce your U.S. tax bill by taking a credit.
- Depreciation differences: Foreign rental properties use a 30-year recovery period (compared to 27.5 years for U.S. rentals).
- The 14-Day Rule: The 14-Day Rule allows homeowners to rent out their home for a total of 14 days or 10% of the total days rented without needing to report the rental income on their US tax return. Furthermore, the 14-Day Rule is not dependent on the total rental income, meaning individuals can earn however much income they want as long as it does not exceed 14 days.
In short, you’re required to disclose and pay taxes on foreign rental income, but there are ways to offset those taxes with credits and deductions to avoid double taxation.
How Do You Report Foreign Rental Income?
You report foreign rental income and deductible expenses on Schedule E (Form 1040). Convert all amounts into U.S. dollars using the IRS exchange rate. If you pay taxes to a foreign country, you may claim a foreign tax credit (Form 1116) to reduce U.S. tax liability.
The way you deduct expenses depends on whether the foreign rental property is used exclusively for rental purposes or if it is owner-occupied for part of the year:
- Fully Rented Property: If the property is rented out 100% of the time, all allowable rental-related expenses—such as foreign property taxes, mortgage interest, repairs, insurance, and depreciation—are deductible on Schedule E.
- Owner-Occupied or Partially Rented Property: If you use the property personally for more than 14 days or 10% of the total days it was rented, you must allocate expenses between rental and personal use. Only the rental portion is deductible on Schedule E, while the personal-use portion may be limited on Schedule A (subject to tax law restrictions such as the SALT cap).
Deductible Foreign Rental Expenses for U.S. Expats
The IRS allows you to deduct many expenses related to managing and maintaining your foreign rental property, which helps lower your taxable income and tax liability.
Here are the deductible expenses U.S. expats can claim:
- Foreign Rental Property Depreciation – You can depreciate your foreign rental property over 30 years.
- Foreign Property Taxes – You can either deduct foreign rental property taxes as an expense or claim them as a foreign tax credit to offset your U.S. tax liability.
- Mortgage Interest on Foreign Property – If you financed your foreign real estate, the interest on the mortgage may be deductible, provided the property is used for rental purposes.
- Repairs and Maintenance – Any necessary repairs or maintenance costs, such as fixing plumbing, painting, or replacing appliances, can be deducted.
- Property Management Fees – If you hire a property manager or pay for rental management services, these costs can be deducted from your rental income.
- Insurance Premiums – Property insurance, liability insurance, and any coverage protecting your rental property are fully deductible.
- Travel Expenses – If you travel to your foreign rental property for management or maintenance purposes, airfare, lodging, and transportation expenses may be deductible, as long as the trip is primarily for rental-related business.
- Advertising and Rental Listing Fees – Costs for advertising your foreign rental property, such as online listings, local newspapers, or social media ads, are deductible.
- Legal and Accounting Fees – If you hire an accountant or attorney to assist with reporting foreign rental income, preparing tax forms, or handling rental contracts, these expenses can be deducted.
- Foreign Bank Fees and Currency Exchange Costs – If you receive rental income through a foreign bank account, transaction fees and currency exchange costs may be deductible.
- Utilities Paid by the Landlord – If you cover utilities such as electricity, water, and gas for the rental property, these costs can be deducted.
- HOA or Condominium Fees – If your foreign property is part of a homeowner’s association or condominium complex, the monthly or annual fees may be deductible as part of rental expenses.
- Foreign Tax Credits – If you pay taxes on your foreign rental income to a foreign government, you may be able to claim a foreign tax credit to avoid double taxation.
By deducting these expenses, U.S. expats can reduce taxable income, minimize their tax liability, and ensure they are in full compliance with IRS reporting requirements. Keeping detailed records of expenses, receipts, and transactions is essential for maximizing deductions and avoiding penalties.
It’s important to note that property taxes on a rental property differ from personal (i.e., owner-occupied) real estate taxes subject to the SALT limitation under the Tax Cuts and Jobs Act of 2017. For rental properties, the SALT cap does not apply, and these expenses remain deductible on Schedule E.
Special Considerations for Owning a Foreign Rental Property Through a Pass-Through Entity
Some U.S. expats structure their foreign rental property through a foreign pass-through entity such as a foreign LLC, foreign trust, or partnership. While this may seem like a smart move for liability protection or local tax benefits, it often creates unnecessary U.S. tax complications.
If your foreign rental is held in a foreign disregarded entity or foreign corporation, you may be required to file Form 8858 or Form 5471, significantly increasing your IRS reporting requirements. These forms add complexity, potential penalties for non-compliance, and additional tax preparation costs.
While Qualified Business Income Deduction (QBID) offers a potential 20% deduction for rental income in some cases, most foreign rental properties do not qualify as a trade or business under IRS rules. That means most expats won’t benefit from QBID, making the entity structure unnecessary for tax purposes.
In most cases, owning the property personally is simpler and avoids the compliance headaches of extra forms, potential IRS scrutiny, and foreign tax complications. Unless there is a clear legal or financial advantage, expats are usually better off reporting foreign rental income directly on Schedule E as an individual owner.
Related: Should Expats Own Foreign Rentals Through an Entity?
Our Approach at 1040 Abroad
At 1040 Abroad, we prioritize simplicity and compliance while minimizing your tax burden. For most expat property owners, properly reporting foreign rental property income on Schedule E and leveraging the foreign tax credit is sufficient to avoid double taxation. If your circumstances require additional reporting, such as filing Form 8858, we charge an additional $500 for this service but only recommend it when necessary.
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