Last Updated on February 20, 2024 by Kristina Valcheva
Renting out your US property while living overseas is a savvy move for those who want to turn that property into a self-sustaining financial asset while enjoying life somewhere else.
Now, for some American landlords, navigating the intricate realm of IRS paperwork involves an overwhelming process.
If you choose to lease your home while living abroad, you need to report the associated income and expenses on your US tax return.
This reporting is done through Schedule E, known as Supplemental Income and Loss.
Rest assured, we’re here to demystify the process.
We’ll simplify IRS reporting for you if you’re an American renting a US home while living abroad or if you live in the States and have an overseas property to rent.
Understanding tax implications for renting your US home while living overseas
Every rent payment you receive for a US property must be reported as rent income to the IRS.
That’s why every property owner must have a strong grasp of their tax responsibilities.
Any payment from your tenant for services, like appliance or window repairs, is also considered income.
Security deposits anticipated for return should not be included in your US expat taxes. However, if the tenant defaults on payments or damages the property, resulting in an unreturned deposit, you must report that deposit as income.
Moreover, if a tenant exchanges services for rent, you must report the fair market value of the rent as income. Yet, you’re eligible to claim the same amount as an expense on your US rental income tax return.
Mastering Schedule E – Record-keeping
Maintaining meticulous records year-round is crucial for ensuring accurate reporting of rental property transactions on your US tax return.
While hiring a rental management company can streamline the process, it often comes with a significant fee which is based on your gross income.
As an alternative, many Americans choose to self-manage their properties from abroad and work with a property tax professional.
Cultivating a habit of effective recordkeeping is key to capturing all expenses, ultimately reducing your overall US expat taxes.
Check how we can help you with your taxes.
Tracking deductible expenses for US expat taxes
If you rent out property in the US, you must share details regarding all of your rental income with the IRS.
However, you can potentially reduce your tax bill by deducting eligible rental expenses from your total rental earnings.
Typically, expats, living abroad, can subtract rental expenses in the year they them.
One often overlooked yet significant deduction is associated with the depreciation of your rental property. Starting from the date you offer your house for rent, you can depreciate the property over a 27-and-a-half-year period.
The basis for depreciation is calculated as the lesser of the fair market value or the adjusted basis, typically your purchase price is adjusted for any improvements.
Additionally, other deductible expenses include mortgage interest, homeowner association dues, cleaning, maintenance, repairs, taxes, and even expenditures related to travel for rent collection or property repairs.
Diligent tracking of these costs is essential to maximize your deductions and ensure accurate reporting on your US expat taxes.
Some typical expenses are:
- homeowner association dues
- home repairs
- travel expenses to repair the property or collect rent
- cleaning
- mortgage interest
Schedule E simplified
As per the IRS, use Schedule E (Form 1040) to report:
- Income or loss from rental real estate, estates, royalties, trusts, S corporations, partnerships, and residual interests in REMICs (real estate mortgage investment conduits).
Each Schedule E can cover up to 3 residential properties.
Keep in mind that the US state where your property is located might impose income tax, possibly requiring a state tax return.
The specifics depend on the tax rules of each state, but feel free to reach out to the PTI Returns team for clarification.
State and Local Taxes
- Expatriates with rental properties in the US may be subject to state and local taxes on their rental income
- The specific tax laws vary depending on the state where the property is located
However, some states do not have income tax - It’s crucial to consult with a tax professional to determine the applicable state and local taxes for your rental property
Determining loss deductions on your US expat taxes
You may qualify to deduct up to $25,000 of loss on your US expat taxes if you were actively involved in rental real estate.
Active participation involves making management decisions and owning at least 10% of the US property.
However, if you weren’t actively participating, your rental loss cannot surpass the income generated by the activity on your US taxes.
But what exactly constitutes “active participation”?
If you own at least 10% of the property and are engaged in making management decisions, you are considered to have materially participated in the rental real estate activity.
Failure to actively participate means your loss cannot exceed the generated income from the activity on your US expat taxes.
Understanding these criteria is essential for determining loss deductions accurately.
Global tax on US rental income
It is possible for the foreign country you’re living in as a US citizen to tax your US rental income.
This is because many countries have a system of “worldwide taxation” which means that they tax their citizens on all of their income, regardless of where it is earned.
In addition to paying taxes on your US rental income in the foreign country where you live, you will also be required to pay taxes on it in the United States.
This means that you will be subject to double taxation on your rental income. However, there are a few provisions in the US tax code and tax treaties that can help to reduce or eliminate your double tax liability.
Our experienced tax professionals can help you navigate double taxation agreements, ensuring you don’t get taxed twice.
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Foreign tax credits for your US rental property
- If you pay foreign taxes on your rental income earned in a foreign country, you may be eligible to claim a foreign tax credit on your US tax return.
- This credit helps offset your US tax liability on foreign income, potentially reducing your overall tax burden.
- Consulting with a tax advisor is essential to determine if you qualify for a foreign tax credit and understand the claiming process.
What are the US tax filing deadlines?
- The general deadline for filing a US tax return is 15 April
- However, US expats living abroad may be eligible for an automatic extension until 15 June
- To claim the automatic extension, file Form 4868 with the IRS before the 15 April deadline
What if I miss the tax filing deadline?
Missing the tax filing deadline can lead to penalties and interest charges. To minimize the impact:
- File Immediately – The sooner you file, the less interest accrues. File your return ASAP to minimize these charges.
- Extension Requests – Sometimes, you might need more time. File Form 4868 to request an extension until 15 October. Remember, an extension delays filing, not paying. Taxes owed are typically due by the original deadline to avoid extra charges.
- Seek Professional Help – A tax advisor can assist with filing, penalty negotiation, and future deadline avoidance strategies.
Seeking professional guidance for complexities and tax compliance
When renting out your US home while living overseas you may find that navigating the intricacies of US expat tax regulations can be complex.
Seeking guidance from an experienced tax professional can ensure accurate reporting, compliance with tax laws, and a reduction in tax owed.
Our dedicated tax professionals can assist you with your rental property tax obligations, whether you’re an American renting a US property overseas or a US resident with real estate abroad that you want to lease
We’ll file your rental tax return in both the US and abroad, ensuring you comply with all applicable regulations. Our tax experts will also guide you through depreciation methods, deductible expenses, and potential tax issues, including double taxation.
Their expertise can help you navigate the complexities of US expat taxes and optimize your financial situation.
What we do and why choose us
For more than 25 years, the PTI Returns team has been supporting expats in filing their US property tax returns.
Our adept tax professionals specialize in filing annual income tax returns in the US, enabling you to concentrate on managing your property from anywhere in the world.
Say goodbye to tax stress and save on your tax bill! File online your US tax return here.
Choose PTI Returns over local accountants for these reasons:
- Cost-Effective Services: We provide a more affordable service compared to your local accountant.
- Effortless Online Filing: Enjoy a user-friendly online one-stop shop for filing tax documents in multiple jurisdictions.
- International Property Tax Know-How: Rely on our expertise in international property tax, including the application of tax reliefs and double taxation.
Check how we can help you with your taxes.