Dealing with any sort of real estate comprises tax implications. It does not matter whether you are buying or renting a house “locally” or “abroad”; you will have to pay taxes. But the good thing is that these property taxes come with tax deduction facilities.
For foreign real estate, the property owner is bound to pay the taxes to the International Revenue Service or IRS. But what are the ways to claim a tax deduction for your foreign real estate? If that is what your concern is right now; here is the answer.
Tax Implications On Foreign Properties In The US
Before going inside the tax deduction facilities let us understand the tax implications you will have to face upon purchasing real estate in the US. The real estate tax implications in the US typically differ on whether you reside on the property or not.
Your sales tax obligations as well as deduction amounts depend on whether you own the property as an individual for your personal use or as an entity to rent or invest in real estate. Let us understand this in the below.
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Foreign Real Estate Purchase as an Individual
The US levies property tax on individuals based on their citizenship and not on their locations. However, the nature of ownership decides whether you will have to report your property for taxes or not.
If you are using the house in a foreign land for personal use, no need to report it to the IRS. But you are obliged to report and pay the sales tax on your foreign property upon using it as a rental.
The Schedule E of 1040 showcases the rules and regulations for filing a property tax in the US. This advises you to accurately mention the numbers of your foreign property along with their location, type, and income options.
Selling your foreign property, therefore, definitely falls under tax obligations. You can surely add the taxes that you pay during this for a return too. In case of house renting too you will have to report it for a tax return.
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Owning a Foreign Real Estate As An Entity
Upon purchase, Section 1.6038D-2 of the IRC advises all the citizens of the US with foreign real estate to file their assets under certain criteria. If you are a citizen of the US, reporting your foreign non-residential asset holdings under the (FATCA) or “Foreign Account Tax Compliance Act” is mandatory.
On the basis of the value of the foreign asset you are holding as an entity; you will have to report it under “Form 8938”. If you fail to file this form, a penalty of – $10,000 will impose on you. Further delay after the notification from the IRS will lead you to a massive penalty of $50,000.
Ways to Claim Sales Tax Deduction On Foreign Real Estate
Now let us understand the different ways to claim for a foreign real estate property tax deduction during your annual tax filing. The ways of tax deduction for different sorts of foreign property are;
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Mortgage Interest Deduction
You can deduct the mortgage interest rates you pay on the amount of $750,000 in case of single ownership and $375,000 in case of joint. If your property purchase occurs before Dec 16 2017 then you can avail of the previous deduction facility of $1 million on qualified mortgage debt.
Note that, you cannot include your expenses on the maintenance, utilities or insurance for tax deductions for your primary residence.
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No Deduction for Foreign Property Taxes
While you can claim for a mortgage interest deduction, your direct property taxes are non-deductible. The property taxes that you pay for your foreign residential properties are not deductible for the tax years of 2018 to 2025
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Tax Deduction on Partial Rental Property
The tax deduction mechanism gets more complex in the case of rental income. Based on the days of renting your property you can claim for a deduction or complete exemption from property taxes.
For instance, there is no need to file taxes if you rent your property for or below only 14 nights with up to $5,000 per night rents. Your foreign property will consider under the second-home rule if you do not rent it over 14 nights per annum.
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Tax Deduction on Fully Rental Property
Your foreign property will fall under the category of rental property if you rent it for over 14 days or reside there for less than 14 days yourself. Claiming a deduction on expenses is possible for mortgage interests, insurance premiums, advertising expenses, property management and utilities expenses.
Additionally, if you are owning and living in a property for the last two years, it becomes your primary residence. You can then exclude up to $250,000 of your capital gain from the tax obligations. In the case of married couples, the numbers will double.
Conclusion
The sales tax on foreign property is complex and often changes. Therefore, to make accurate tax filing, reporting and deduction claims, you will need the help of a tax consultant. Be knowledgeable, and be updated on the changing norms of taxes from time to time. Don’t forget to follow the taxation rules of the foreign land along with your native ones too.
Also, Read – Everything You Need to Know About Sales Tax Deduction
FAQs
1. Is foreign property depreciable?
Yes, if you use your foreign property as a rental, you can depreciate it in income tax returns. The native US property is depreciated over 27.5 years, whereas foreign residential properties have it for over 30 years.
2. Can I deduct My Foreign Property Taxes?
No, since 2017, you cannot claim a direct tax deduction on your foreign property taxes. You can only get deductions on your mortgage interests, home insurance, and utility expenses.
3. How long I can exclude from my property-selling capital gain?
Avoiding paying taxes on properties worth up to $250,000 on your capital gain as a single owner is possible. In the case of joint ownership, you can claim the same for $500,000 worth of property.
4. What is 1031 exchange?
Using the 1031 exchange norm you can sell an overseas property and buy another one without paying taxes. This helps you to avoid paying direct taxes on property selling capital gains in buying and selling foreign properties.
