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Foreign rental income is subject to US taxes, and it is treated as passive income, taxed at the standard federal rate. While foreign and US rental properties are governed by mostly the same rules, there are some differences. For instance, foreign properties fall under the Alternative Depreciation System (ADS), requiring a 30-year schedule for residential rentals as of 2025. Additionally, foreign property taxes for personal use properties are no longer deductible on Schedule A, but they remain deductible on Schedule E for rental properties. If you have foreign bank accounts or receive distributions from foreign trusts, you must disclose this information, and if your foreign financial assets exceed certain thresholds, you may need to file a FATCA report. Foreign rental income and deductible expenses are reported on Schedule E (Form 1040), while Schedule B is used when you receive over $1,500 in taxable interest or ordinary dividends during the tax year, including foreign financial interests.
| Characteristics | Values |
|---|---|
| Foreign rents received | Report on Schedule E (Form 1040) |
| Foreign rents received threshold | Not applicable |
| Foreign rents received and foreign financial interests | Report on Schedule B (Form 1040) |
| Foreign rents received and foreign financial interests threshold | $1,500 |
| Foreign rents received and foreign bank accounts | Report on FBAR if the total value of all foreign accounts exceeds $10,000 at any point during the year |
| Foreign rents received and foreign bank fees and currency exchange costs | Deductible |
| Foreign rents received and utilities paid by the landlord | Deductible |
| Foreign rents received and HOA or condominium fees | Deductible |
| Foreign rents received and foreign tax credits | Deductible |
| Foreign rents received and foreign property taxes | Deductible as an expense or claimable as a foreign tax credit |
| Foreign rents received and mortgage interest on foreign property | Deductible |
| Foreign rents received and repairs and maintenance | Deductible |
| Foreign rents received and foreign housing exclusion | Report on Form 8873 |
| Foreign rents received and foreign LLC, trust, or partnership | May require filing Form 8858 or Form 5471 |
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What You'll Learn
Foreign rental income is taxable
While foreign rental property and US rental property are mostly governed by the same rules, there are some differences. For example, foreign properties fall under the Alternative Depreciation System (ADS), which requires a 30-year schedule for residential rental properties as of 2025. This allows owners to spread the cost of their rental property over time, reducing their tax bill. Additionally, foreign property taxes for personal use properties are no longer deductible on Schedule A, but they remain deductible on Schedule E for rental properties.
It is important to note that foreign rental income is not eligible for the Foreign Earned Income Exclusion (FEIE). However, deductions, depreciation, and credits like the Foreign Tax Credit can help reduce the tax burden. For instance, if foreign property taxes have been paid, they can be deducted as an expense or claimed as a foreign tax credit to offset US tax liability.
US expats with foreign rental income must also be mindful of additional reporting requirements. If rental income is deposited into a foreign bank account and the total value of all foreign accounts exceeds $10,000 at any point during the year, an FBAR must be filed. Furthermore, if total foreign financial assets, including bank accounts, investments, or the rental property itself, exceed certain thresholds, a FATCA report must be filed. These thresholds vary depending on the filing status, with higher thresholds for married couples filing jointly.
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Foreign property taxes
Secondly, foreign property taxes for personal use properties are no longer deductible on Schedule A, but they remain deductible on Schedule E for rental properties. Additionally, foreign properties fall under the Alternative Depreciation System (ADS), requiring a 30-year depreciation schedule for residential rental properties as of 2025. This differs from the 27.5-year schedule used for US residential rentals.
Thirdly, when purchasing foreign real estate, the transaction itself does not trigger automatic US tax reporting. However, related financial activities, such as opening a foreign bank account to manage rental income, may require the filing of an FBAR (Foreign Bank Account Report) if the total value of foreign accounts exceeds $10,000 during the year. Furthermore, owning property through a foreign entity may trigger FATCA (Foreign Account Tax Compliance Act) reporting rules and require the filing of Form 8938 if foreign financial assets exceed certain thresholds. These thresholds vary depending on filing status and location.
Finally, when selling foreign property, any gain or loss must be reported on the US tax return, similar to selling domestic property. The sale price must be converted to US dollars using the exchange rate on the date of sale, and the profit or loss is determined by subtracting the adjusted basis (purchase price plus improvements) from the sale price. Depending on the situation, capital gains taxes may apply, but foreign tax credits can help reduce the overall tax liability.
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Foreign bank fees and currency exchange costs
Foreign rental property and US rental property are generally governed by the same rules, but there are some differences. All US citizens and Green Card holders must declare their worldwide income to the IRS, including rental income from foreign properties. This rule applies regardless of where you live or where the property is located. Foreign rental income is treated as passive income and is taxed at the standard federal rate, and deductions can be applied.
Rental income received in foreign currency must be converted to USD using the IRS annual average exchange rate. For example, if you earned €20,000 in rent and spent €5,000 on repairs, convert both amounts to USD based on the applicable rate. This would give you $21,600 and $5,400, respectively, resulting in $16,200 in taxable income.
Foreign transaction fees are charged when payments are made in a foreign currency or processed through foreign banks. These fees typically range from 1% to 3% of the transaction amount, plus potential exchange rate markups. For example, at a market exchange rate of 0.90, an expense of 500 EUR would be 555.55 USD, with 44.45 USD paid in foreign transaction fees (32.69 from the currency conversion and 11.76 from a 2% fee). The payer is charged a percentage fee on the transaction by the bank, credit card, or digital payment platform they use to send money. The payment processor used to collect funds also charges a percentage fee to the receiver for currency conversion.
To avoid or reduce foreign transaction fees, consider the following strategies:
- Use no-foreign-fee credit cards.
- Use third-party payment providers.
- Negotiate with your bank.
- Open a foreign currency bank account if you frequently transact in a specific foreign currency.
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Foreign housing exclusion
The Foreign Housing Exclusion is a tax benefit that helps US expats reduce their tax liability by allowing them to exclude certain housing costs from their total foreign earned income. This exclusion is applicable only to housing expenses paid with taxable foreign earned income from employment and not for those who are self-employed, who may qualify for the Foreign Housing Deduction instead.
To qualify for the Foreign Housing Exclusion, you must first qualify for the Foreign Earned Income Exclusion (FEIE) by meeting either the bona fide residence test or the physical presence test. The bona fide residence test requires you to be a resident of a foreign country for an uninterrupted calendar year (from January 1 to December 31), while the physical presence test requires you to be physically present for 330 full days within any 12 consecutive months. Even a brief moment spent in the US, such as a single minute, counts as a full day in the US.
Once you meet the eligibility criteria, you must file Form 2555 with your US tax return to claim the Foreign Housing Exclusion. Qualified housing expenses that can be excluded include rent, utilities (excluding telephone), property insurance, small repairs, and parking fees. However, these expenses must exceed the base housing amount, which is typically 16% of the FEIE for the year. The maximum amount you can exclude or deduct for housing is generally 30% of the FEIE, unless a higher high-cost locality limit applies.
It is important to note that the Foreign Housing Exclusion only applies to amounts considered paid for with employer-provided funds. This includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income for that year. By choosing the Foreign Housing Exclusion, you cannot claim a foreign tax credit or deduction for taxes on the same income.
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Foreign tax credits
The foreign tax credit is a US tax break that offsets income tax paid to other countries. It is designed to reduce the double tax burden that would otherwise arise if you were taxed on the same income twice. To qualify for the foreign tax credit, the tax must be:
- Imposed on you by a foreign country or US possession.
- Paid or accrued to a foreign country or US possession.
- The legal and actual foreign tax liability you paid or accrued during the year.
- An income tax (or a tax in lieu of income tax).
If you qualify for an exemption, you can claim the tax credit directly on Form 1040. If you claim the foreign earned income exclusion and/or the foreign housing exclusion, you cannot take a foreign tax credit for taxes on the income you excluded. If you do, the IRS may revoke one or both of your choices.
To claim the foreign tax credit, individuals, estates, or trusts file Form 1116, while corporations file Form 1118. If you are a cash-basis taxpayer, you can only take the foreign tax credit in the year you pay the foreign taxes unless you elect to claim the foreign tax credit in the year the taxes are accrued by checking the "Accrued" box in Part II of Form 1116 on a timely-filed original return.
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