Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
Reporting income from a rental property can be complicated. If your rental property is in a foreign country, there are a few additional steps and considerations. From foreign income and real estate taxes to depreciation methods and converting the currency from the foreign denomination to the U.S. dollar (USD), here are steps to report your foreign rental income and expenses along with additional items to be considered.
NOTE: If you pay foreign income taxes on your rental income, you will need to use a different software provider or a local tax professional to claim the foreign tax credit on your foreign rental income. FreeTaxUSA only supports the foreign tax credit for income reported on Forms 1099-INT, 1099-DIV, and Schedule(s) K-1 from forms 1041, 1065, and 1120/1120-S.
- Convert your income and expenses from the foreign currency to USD.
- You can use online resources like xe.com, and the IRS provides yearly average exchange rates
- All income and expenses need to be reported in U.S. dollars.
- If possible, use the exchange rate for the day you received the income or paid the expenses.
- If using the exchange rate for the date you received the income or paid expenses is not practical, you can choose to use the average exchange rate for the tax period.
- For example, your rental property in Belize had a water heater replaced with a cost of $10,000 Belize Dollars (BZD) on October 5, 2024. If the spot rate for that day was $1 BZD to $0.4868 USD, the $10,000 BZD cost of the new water heater would equal $4,868 USD. If the property was rented year-round for $30,000 BZD and the average exchange rate was $1 BZD to $0.50 USD, your gross rental income would be $15,000 USD for the year.
- Choosing a depreciation method.
- Foreign real estate doesn’t qualify to be depreciated in 27.5 years under the Modified Accelerated Cost Recovery System (MACRS).
- Foreign rental property is depreciated over 30 years under the Alternative Depreciation System (ADS). Prior to 2018, foreign rental property was depreciated over 40 years.
- Example: The rental property in Belize was purchased and placed into service for $100,000 USD on 1/2/2024. Assuming $1 USD to $1 BZD, if the property was in the U.S., it would be depreciated under MACRS over 27.5 years in the amount of $3,636 per year The property in Belize will be depreciated slower at a rate over 30 years in the amount of $3,333 per year.
- Determine your foreign income taxes from the rental property
- If the country where your rental is located requires you to file an income tax return for your rental income, you will likely want to claim a foreign tax credit for any year where you have a net income for the rental property that is reported to the foreign government.
- If there is taxable income and income tax reported on the foreign income tax return, you will most likely want to claim the foreign tax credit.
- Unless the foreign rental income is reported through a Schedule K-1 from Form 1041, 1065, or 1120/1120-S, you will need to consider using a different self-preparation tax software or hiring a local tax preparer to prepare your tax return.
- Additional considerations
- If there are foreign bank accounts related to the rental property, and the value of those accounts exceed $10,000 at any point during the year, you must file an FBAR on FinCen Form 114.
- If the rental property is owned by or through a foreign business entity (such as a partnership) you will need to consider the value of your partnership share in addition to the balances of bank accounts in determining whether you will need to file Form 8938.
Rental properties can be challenging to deal with at tax time. If you have any questions or concerns about your foreign rental property, feel free to contact our Pro Support for access to tax professionals as you work on your return.