Foreign property tax: what to know before buying or selling real estate abroad
Dreaming of a vacation home, planning a big move, or eyeing an investment overseas? Before you take the leap, it’s essential to understand how foreign property tax works – not just in your new country, but in the US as well.
This guide is for US citizens, expats, and investors who want to avoid costly surprises and stay fully compliant with tax rules when buying, renting, or selling real estate abroad.
This article is brought to you by Taxes for Expats (TFX) – a top-rated tax firm serving US citizens, residents, and anyone with US tax obligations, both at home and abroad. Need guidance on foreign property taxes? We're here to help. Schedule your free discovery call, and we’ll review your case and walk you through the next steps.
Do US citizens pay tax on foreign property?
Simply owning property abroad doesn’t trigger US taxes. However, income you earn from the property and profits from selling it are both taxable and must be reported to the Internal Revenue Service (IRS). As a US taxpayer, you’re taxed on your worldwide income, regardless of where you live or where your property is located.
Tax implications on buying property overseas
Buying a property abroad isn’t a taxable event in the US. As mentioned above, you don’t owe tax just for making the purchase, and you don’t need to report the transaction to the IRS.
However, how you finance the purchase and what you do with the property afterward can affect your tax situation. For example:
- If you open a foreign bank account to manage mortgage payments or rental income, and your total foreign account balances exceed $10,000 at any point in the year, you must file an FBAR (foreign bank account report).
- If your foreign financial assets (including property held through certain entities) exceed $200,000 (for individuals living abroad), you may need to file Form 8938 under FATCA. Learn more about FATCA thresholds here.
Renting out foreign property
If you rent out your foreign property, the IRS treats this income just like rental income from US property. This means that you must report it on your US tax return, even if you don’t transfer the funds to the US.
You can deduct many expenses:
- repairs and maintenance
- property taxes paid abroad
- depreciation (calculated using US rules)
- mortgage interest
If you own an apartment abroad that is being rented out and you later sell it, the tax consequences will depend on the allowable depreciation, the length of time it was rented, and how much tax you paid in the foreign country, if any. Generally, you would pay roughly 15% gain on the sale of the property before any foreign tax credits are applied. Learn more about capital gains tax rates in this IRS publication.
If you’re renting out property abroad, both the US and the foreign country may tax your rental income. However, the country where the rental is not located usually relieves double taxation.
Selling foreign property: What are the tax consequences?
When selling foreign property, you need to consider both local and US tax consequences. Selling the property might lead to capital gains tax in the country where it is situated, and you are required to report the sale to the IRS, possibly incurring US taxes on any profit.
When you sell foreign property, calculating your capital gain or loss starts with determining your cost basis. Here’s how to calculate your cost basis:
- Start with the original purchase price: Convert the amount you paid for the property to US dollars using the exchange rate on the date of purchase.
- Add allowable acquisition costs: This can include settlement or closing costs, legal fees, title insurance, and real estate taxes paid on behalf of the seller. Example: if you bought a property in Canada for $110,000 and paid $10,000 in sales tax, your initial basis would be $120,000.
- Include major improvements: Substantial renovations, additions, or upgrades increase your basis. Each improvement should be converted to USD using the exchange rate on the date the expense was paid. Regular maintenance (like painting or fixing a leaky faucet) does not increase your basis.
- Subtract depreciation (for rental property): If you claimed depreciation deductions for a rental property, reduce your basis by the total amount of depreciation claimed over the years.
- Adjust for insurance reimbursements or losses: If you received insurance payouts for casualty or theft losses, subtract these amounts from your basis.
Example: Suppose you purchased a home in Portugal for €200,000 when the exchange rate was 1.15 USD/EUR, making your purchase price $230,000. Over the years, you spent $30,000 (converted at the time of each improvement) on major renovations. You also claimed $10,000 in depreciation while renting the property. Your adjusted basis would be $230,000 (purchase price) + $30,000 (improvements) – $10,000 (depreciation) = $250,000.
When you sell the property, convert the sale price to USD using the exchange rate on the date of sale. Subtract your adjusted basis from the sale price to determine your capital gain or loss. For instance, if you sell the property for $350,000, your capital gain would be $100,000 ($350,000 – $250,000).
All amounts reported on your US tax return must be converted to US dollars. This applies to your purchase price, mortgage payments, and any other related expenses. Use the exchange rate in effect on the date of each transaction.
Section 121 exclusion
If the property was your primary residence for at least two out of the last five years, you may be able to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from US tax. This exclusion applies whether your home is in the US or abroad, as long as you meet the ownership and use tests. You cannot have claimed this exclusion on another home sale in the previous two years.
Taxes on inherited property abroad
If you inherit property located outside the United States, you generally won’t owe US income tax on the inheritance itself. You do not need to file anything as a beneficiary, but keep the estate’s valuation documents for your records.
Future income or gains from the property – such as rental income or profit from a sale – are taxable and must be reported on your US tax return.
When you sell inherited foreign property, US capital gains tax applies to the difference between the sale price and the property’s fair market value at the date of the original owner’s death (the stepped-up basis).
Solve your tax question – ask professionals
Overwhelmed by taxes on foreign property? With the right information, it gets easier.
Submit your question, and you’ll receive an answer from tax experts within a few business days. While we can’t provide detailed consultations without reviewing your documents, we’ll do our best to assist.
Reporting requirements and compliance
US taxpayers with foreign property often face extra reporting requirements. You may need to file FBAR if your foreign financial accounts exceed $10,000 at any time during the year or FATCA if your foreign financial assets exceed certain thresholds.
Depending on your situation, you may need to file additional forms: Form 1116 for the FTC, Form 8949 for capital gains, or Schedule E (Form 1040) to report your rental property depreciation.
Penalties for non-compliance can be severe, including hefty fines and even criminal charges. When in doubt, consult a tax professional to ensure you meet all reporting obligations in the United States.
Need help with foreign property taxes?
If you’re buying, renting out, or selling property abroad, you can face complex IRS reporting rules and the real risk of double taxation. At Taxes for Expats, we’ll help you report your foreign accounts, stay compliant with the IRS, and make the most of tax-saving strategies and tax credits available for US property owners abroad.
