US Expats Taxes on Rental Income. Obligations and Deductions
Explanation of Rental Income Profit and Loss Reporting
If you have been an expat for some time, you are likely already aware of your requirement to file an annual US tax return while living and working abroad. This requirement extends to your rental properties, both in the United States and in foreign countries. This article will focus on worldwide rental income and the deductions available for certain expenses. It’s important for you to understand that this article is not intended to serve as a complete guide for claiming rental income and losses; we will just be touching upon various key points.
If you have rental income from domestic or foreign real estate, it’s important to maintain thorough records of both expenses and profit. While you are required to pay taxes on rental income, there are a variety of deductions available to you to help minimize or eradicate any tax liability. Some of your qualifying expenses include repairs, the cost of maintenance, property depreciation, fees such as HOA (Homeowner Association), and a variety of other expenses which arise as the result of owning rental property.
Reporting Rental Activity on Schedule E
Schedule E is the primary catch-all form for all rental income activity include both profit and expenses. While additional forms will be required, Schedule E will list both income and expenses. When it comes time to file your U.S. expat tax return, you will attach Schedule E and other forms outlined below to Form 1040. Remember that Schedule E only allows information about 3 or fewer rental properties, so if you have more than 3 you can count on having even more forms to fill out.
Claiming Depreciation on Form 4562
If you are interested in claiming depreciation as a deduction on your rental income, you will be required to file Form 4562 along with Schedule E. It’s important to know that the depreciation deduction does not only apply to the depreciation of each rental property you own; it also applies to the vehicle you use when en route to each location. The vehicle deduction is allowed because your travel to and from rental properties is considered direct rental expenses by the IRS, so that means your mileage is also deductible – along with any repairs or leasing costs. To learn more about Form 4562, refer to Publication 946 or contact one of our friendly US expat tax professionals.
Limitations and Forms for Claiming Rental Losses
Like many deductions, there are certain limits to the amount of losses you’re able to claim. Depending on the amount or type of expenses you are claiming, you may be required to fill out Form 6198 and/or Form 8582.
Form 6198: At-Risk Limitations
An at-risk ruling may apply to you if you have rental activity in investments associated with your property that are held or acquired as a means of producing income. This ruling only applies to properties rented after 1986. If you feel you have been involved in this type of activity, take the time to find out if you’re required to fill out and attach Form 6198 to Schedule E and mail it to the IRS with your US expat tax return.
Form 8582: Passive Activity Loss Limitations
When dealing with rental property, you are generally speaking of passive income. There are a couple of exceptions to this rule, but basically if you are claiming losses from your rental property, then you won’t be able to gain credits from your losses for the tax year in which the losses occurred. Claiming losses on passive property only allows you to apply the credit to future returns on which rental income gains are reported. In order to claim losses on rental income you must fill out Form 8582 and attach it to Schedule E.
There are 2 exceptions to the passive activity loss limitations: Real property businesses (or real property trades) and real estate professionals.