Property abroad: rent, sell or keep
A home abroad is simple for the IRS until you rent it out or sell it. Then the U.S. wants the numbers, worked out in dollars, which can show a gain even when nothing changed in your local currency.
The short version
- A home you own directly doesn't go on the FBAR or Form 8938.
- Rent goes on your U.S. return, with expenses, depreciation over 30 years and a credit for local tax on it.
- When you sell your main home, up to $250,000 of gain ($500,000 for couples) can be excluded.
- Gains are measured in dollars, so currency moves can create a U.S. gain, and a foreign mortgage can create one of its own.
1Owning it
Real estate you own in your own name isn't a foreign financial account, so it doesn't go on the FBAR or Form 8938. Property held through a foreign company or trust is different: the company or trust can bring forms of its own, such as Form 5471 or Form 3520.
2Renting it out
- Rent goes on your U.S. return, less expenses such as mortgage interest, repairs, insurance and local property tax.
- Foreign rental homes are depreciated over 30 years, or 40 if first rented before 2018, rather than the 27.5 years for U.S. homes.
- Local tax on the rent usually counts toward your foreign tax credit.
3Selling it
- Your main home: if you lived in it for two of the five years before the sale, up to $250,000 of gain is excluded, or $500,000 for couples filing jointly. That works for homes abroad too.
- Moved out and rented it? You generally have three years from moving out to sell and still meet the two-of-five-years test.
- A rental or second home: the gain is taxable at capital gains rates, with the part from depreciation taxed at up to 25%.
- Local tax on the sale can usually be credited.
4Currency gains
The U.S. measures your gain in dollars: the price you paid at the exchange rate when you bought, and the sale price at the rate when you sold. If the local currency rose against the dollar, you can have a U.S. gain even though the local price didn't move.
A mortgage in the local currency can add a gain of its own. If the currency falls against the dollar while you pay off the loan, the IRS can treat part of the payoff as a taxable currency gain, while a currency loss on a home loan generally can't be deducted.
Sold property abroad in a year you didn't file? If it wasn't deliberate and you live abroad, the Streamlined Foreign Offshore Procedures let you catch up with no penalty, if you qualify. See IRS tax amnesty options for expats.
Common questions
Does my home abroad go on the FBAR?
No, not if you own it directly. Bank accounts tied to it, like one for the rent, do count.
I inherited a house abroad. What did it cost me?
For U.S. tax, usually its value on the date of death, converted to dollars at that day's rate. An inheritance over $100,000 from a foreign person also goes on Form 3520.
Can I deduct mortgage interest on a home abroad?
On a rental, yes, as a rental expense. On your own home, the usual U.S. rules for mortgage interest apply, foreign lenders included.
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Reviewed by Lewis Grunfeld, CPA. Based on IRS Publications 523, 527 and 946. General information, not advice for your specific situation.