Foreign rental income tax guide: how to report, deduct expenses, and stay compliant
If you earn foreign rental income – whether from a vacation apartment in Spain, a family home in Mexico, or a long-term lease in Canada – you must report it to the Internal Revenue Service (IRS). Many Americans believe that paying taxes in the country where their property is located exempts them from US reporting requirements, but that’s not the case. Failing to report foreign rental income can lead to penalties, interest, and audits.
This guide explains how to report rental income from overseas property, which expenses you can deduct, and how to stay compliant with IRS rules.
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. Do you have rental income from a property abroad? Have questions about tax requirements? We’re here to assist you – learn more about our tax services or contact us.
Do US citizens need to pay tax on foreign rental income?
Yes, US citizens and green card holders must pay US income tax on foreign rental income. The United States operates under a citizenship-based tax system, meaning US persons are taxed on their worldwide income regardless of where they live or where the income is generated.
Your foreign rental income becomes part of your overall taxable income and is subject to ordinary income taxes.
The IRS imposes substantial penalties for failing to report your income. Late filing penalties start at 5% of unpaid taxes per month, up to 25% of the total tax owed. If the IRS determines that the failure to file was willful, additional penalties can reach $10,000 or more per unreported foreign account.
How to report foreign rental income (step-by-step)
Foreign rental income is reported on Schedule E (Form 1040), just like domestic property. The difference lies in handling foreign currency, depreciation rules, and cross-border tax credits.
Here’s how to properly report your foreign rental property income:
Step 1: Convert all foreign currency to US dollars.
Use a reasonable, consistently applied exchange rate (e.g., Treasury yearly averages) for recurring items. For one-off expenses, use the rate on the date paid (or accrued, if you use that method).
Step 2: Complete Schedule E.
List your foreign rental properties separately on Schedule E. Include the property address, type of property, and whether you actively participated in the rental activity.
Step 3: Report gross rental income.
Enter the total rental income received during the tax year, converted to US dollars. This includes regular monthly rent, security deposits that you keep, and any additional fees paid by tenants.
Step 4: Calculate your net rental income.
Subtract allowable deductible expenses (see below) from your gross rental income. The resulting net income (or loss) carries over to your Form 1040.
Properties rented for 14 days or fewer per year may qualify for an exception that allows you to exclude the rental income from your tax return entirely.
Deductible foreign rental expenses
You can deduct ordinary and necessary expenses related to your foreign rental property, similar to US rental properties.
These are the main categories of deductible expenses:
Property maintenance and repairs
- routine maintenance costs
- minor repairs that don’t add value to the property
- cleaning and maintenance supplies
- emergency repair costs
Property management costs
- property management fees paid to local companies
- real estate agent commissions for finding tenants
- legal fees related to tenant issues
- advertising costs for finding renters
Operating expenses
- property insurance premiums
- utilities you pay as the landlord
- property taxes paid to the foreign government
- mortgage interest on loans secured by the rental property
Foreign property taxes are not creditable – instead, you deduct them on Schedule E as rental expenses.
IRS rules for foreign investment property
As mentioned above, the IRS applies specific rules to foreign real estate that differ from domestic rental properties.
Foreign rental property depreciation
Foreign residential rental properties must be depreciated over 30 years using the straight-line method (ADS system), compared to 27.5 years for US residential rentals. This longer depreciation period means smaller annual deduction amounts but extends the benefit over more years.
Example: A $300,000 apartment in Italy (excluding land value) allows $10,000 annual depreciation instead of $10,909 for a US property. The difference seems small yearly but adds up over time and affects recapture tax upon sale.
Learn more about rental depreciation on the IRS website.
Mixed-use properties
If you use your foreign property for both personal vacation time and rental income, you must allocate expenses between personal and rental use. Only the rental portion of expenses can be deducted against rental income.
Property ownership structures
Direct personal ownership of foreign rental properties typically provides the simplest tax reporting structure. Owning foreign rental properties through foreign corporations, partnerships, or limited liability companies (LLCs) creates additional more complex reporting requirements. Form 5471 is required for foreign corporations, Form 8865 for foreign partnerships, and Form 8858 for foreign disregarded entities.
Other reporting requirements: FBAR & FATCA
Foreign rental income often flows through foreign bank accounts, triggering additional reports.
Report of foreign bank and financial accounts (FBAR)
If you maintain foreign bank accounts to collect rental income and the combined balance of all your foreign accounts exceeds $10,000 at any time during the year, you must file FinCEN Form 114 (FBAR).
The FBAR is due April 15th with an automatic extension to October 15th .Penalties for civil assessments on or after January 17, 2025: up to $16,536 per non-willful violation, and for willful violations the greater of $165,353 or 50% of the account balance.
Foreign account tax compliance act (FATCA)
For US taxpayers abroad, FATCA must be filed if foreign assets exceed $200,000 at year-end or $300,000 anytime in the year (single filers). Directly held property doesn’t count, but related accounts or entity-held assets do. Penalties start at $10,000, with up to $50,000 in additional penalties for continued non-filing.
Can you use the foreign tax credit to offset foreign income taxes paid on rental income?
Yes. Form 1116 allows you to claim a credit for foreign income taxes paid on rental income. This prevents double taxation but is capped at the US tax liability on that same income.
Common mistakes with foreign rental income reporting
- Missing depreciation on foreign rental property (must use 30-year ADS).
- Not filing FBAR/FATCA when a local bank account holds rent.
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Currency conversion errors, using inconsistent rates across income and expenses.
Overlooking local property taxes and not realizing they’re deductible but not creditable. - Passive activity loss assumptions – many assume current losses offset wages, but PAL rules often defer those deductions to future years.
Need help navigating foreign rental property taxes?
Handling rental income from abroad can be tricky. Missing forms, miscalculating foreign tax credits, or overlooking deductions can lead to penalties or lost savings.
At Taxes for Expats, our tax professionals make the process straightforward. We help you stay fully IRS-compliant while ensuring you take advantage of every deduction and credit available.
Since 2001, Americans living abroad have trusted us to manage their US taxes on foreign rental properties. With experience in over 190 countries, we have the knowledge to handle even the most complex situations.
FAQ
Yes, you must report all foreign rental income on your US tax return regardless of taxes paid to foreign governments. However, you can often claim foreign tax credits to reduce or eliminate double taxation on the same income.
You must report your share of the rental income and expenses on your US tax return. If you own 50% of a property generating $40,000 in rental income, you report $20,000 as your share. The non-US co-owner has no US reporting obligations for their portion.
Your obligation to report foreign rental income continues regardless of where you live. US citizens and green card holders must report worldwide income on their US tax returns even while living abroad.
US and foreign tax systems usually have different rules for allowable deductions. You can generally deduct legitimate rental expenses on your US return even if the foreign country doesn’t allow the same deductions, as long as the expenses meet US tax requirements for ordinary and necessary business expenses.
