Foreign rental property depreciation for US expats: ADS rules, 30 vs 40 years, and examples

Foreign rental property depreciation requires the use of ADS – the Alternative Depreciation System, which is one of the two systems within MACRS. Here is what that means in practice:

• Foreign residential rental property used predominantly outside the US must be depreciated under ADS.
• ADS uses straight-line depreciation.
• Recovery period: generally 30 years for residential rental property placed in service after 2017.
• Recovery period: 40 years for nonresidential real property.
• Land is never depreciated, and all values must be reported in USD.

US citizens and green card holders are required to report worldwide income, and that includes rental income from properties abroad. The IRS treats foreign rental property differently from domestic property when it comes to depreciation, and getting the method wrong affects every year of your return.

This article walks through the correct depreciation method, how to calculate your deduction, which recovery period applies, and the mistakes that show up most often on expat returns.

What makes foreign rental property depreciation different?

Depreciation for foreign rental property works differently from that of most US-based properties. Foreign residential rental property used predominantly outside the United States must be depreciated under ADS, one of the two systems within MACRS.

GDS, the accelerated system within MACRS, is not permitted for foreign residential rental property. This means smaller annual write-offs compared to most domestic properties, and the distinction is mandatory regardless of where the property is located.

Step 1: Determine your depreciable basis (not the full property value)

Your depreciable basis is not the same as the purchase price. It includes the purchase price, closing costs, and any capital improvements made to the property – but the value of the land must always be excluded. If the property was first used personally and later converted to rental use, your depreciable basis is the lesser of the property’s fair market value or adjusted basis on the date of conversion, after excluding land.

If you purchased the property, your basis starts with what you paid, plus eligible closing costs. A licensed local appraiser can help you establish the land-to-building split, and depending on the country, you may need the appraisal translated into English.

If you inherited the property, your basis is generally the fair market value on the decedent’s date of death, or the alternate valuation date if properly elected. This may increase or decrease the depreciable basis compared with the prior owner’s basis.

Example: You purchase a rental apartment abroad for $300,000. An appraisal determines that the land is worth $60,000. Your depreciable basis is $240,000 – and that is the number you divide by 30 or 40 to get your annual deduction.

Step 2: Convert your property value to USD correctly

All depreciation calculations must be reported in USD. For basis items such as a purchase price or capital improvement, use the exchange rate that applies when the item is paid, incurred, or accrued. The IRS does not publish one official exchange rate, but generally accepts a posted rate used consistently.

Annual average rates are acceptable for recurring rental income throughout the year, but they are not appropriate for the basis. Using the wrong rate here produces an incorrect basis that compounds across every year of depreciation.

The IRS does not publish an official exchange rate, but generally accepts any posted rate used consistently. It provides government and external exchange-rate resources as well as yearly average tables as a reference.

Example: You bought a property in Spain on June 10, 2022, for €200,000. The EUR/USD rate that day was 1.06. Your depreciable basis in USD is $212,000 – and that is the number you carry forward into every depreciation calculation.

Foreign rental property depreciation: IRS rules explained

The IRS requires depreciation on foreign rental property to be calculated using ADS – the Alternative Depreciation System. This means straight-line depreciation only: the same deduction every year, spread evenly across the entire recovery period.

GDS – the General Depreciation System, which allows accelerated deductions on domestic property, is generally not permitted for foreign residential rental property. If GDS has been applied to a foreign property on past returns, that is an error that needs to be corrected.

When does depreciation start and stop?

Depreciation begins on the date the property is placed in service to produce income. It stops when you have fully recovered your basis or stop using the property as a rental.

Mid-month convention

In the first and last year of ownership, you only receive a half-month of depreciation for the month the property was placed in or taken out of service. As a US citizen living abroad, this deduction applies to your worldwide rental income the same way it would domestically – just under different rules.

30-year vs 40-year depreciation: which applies to you?

The foreign rental property depreciation life depends primarily on when the property was placed in service. The Tax Cuts and Jobs Act of 2017 shortened the ADS recovery period for foreign residential rental property from 40 to 30 years, effective January 1, 2018.

For property placed in service before January 1, 2018, the general ADS recovery period is 40 years, but a 30-year period may apply in limited cases if the property was held by an electing real property trade or business and had not previously been subject to ADS.

 

A 30-year period may apply if the property was held by an electing real property trade or business and had not previously been subject to ADS.

The difference adds up. On a $240,000 depreciable basis, the 30-year period gives you $2,000 more in annual deductions than the 40-year period.

Based on a TFX client scenario: A US expat owned two rental properties in Portugal – one purchased in 2015, one in 2021, both with a depreciable basis of $240,000. The 2015 property required a 40-year life ($6,000/year); the 2021 property used 30 years ($8,000/year). Same country, same basis, $2,000 difference in annual deductions – because one property was placed in service before 2018 and the other after 2017.

What exactly can be depreciated (and what cannot)

Not everything associated with a foreign rental property qualifies for depreciation of foreign rental property. The basic rule is straightforward: the building and any permanent improvements are depreciable, the land is not.

The following items can be depreciated:

• The structure itself (walls, foundation, floors).
• A new roof or major structural repairs that qualify as improvements.
• Extensions or additions to the building.
• Permanent fixtures installed as part of the property.

The land underneath the building never qualifies, regardless of its value. If you paid $350,000 for a property and a local appraisal puts the land at $80,000, only $270,000 enters your depreciation calculation.

How to depreciate foreign rental property

To depreciate foreign rental property, establish your USD basis, remove the land value, divide by 30 or 40, and apply the mid-month convention in year one. Based on a TFX client scenario – a US expat who purchased a rental apartment in Germany in 2022 – here is how the calculation works:

The facts:

• Purchase price: €320,000.
• EUR/USD rate on date of purchase (March 10, 2022): 1.11.
• Land value per local appraisal: 20% of total purchase price.
• Placed in service: April 1, 2022.

Step 1 – Convert to USD

€320,000 × 1.11 = $355,200

Use the exchange rate on the exact date of purchase – not an annual average.

Step 2 – Remove the land value

$355,200 × 20% = $71,040 (land)

$355,200 – $71,040 = $284,160 depreciable basis

Step 3 – Apply the correct recovery period

Property placed in service after December 31, 2017 → 30-year ADS

Step 4 – Calculate annual depreciation

$284,160 ÷ 30 = $9,472 per year

Step 5 – Apply the mid-month convention for year one

April is month four. Months remaining in the year (including half of April): 8.5

$9,472 × (8.5 ÷ 12) = $6,709 deduction in year one

From year two through the end of the recovery period, the full $9,472 annual deduction applies for each full year. The first and last years are prorated under the mid-month convention.

Depreciation also directly affects your tax position when you sell, particularly in relation to foreign property taxes and capital gains on the eventual sale.

Not sure if you're calculating depreciation correctly? Even a small error compounds across decades.

 

Learn more

Repairs vs improvements: what must be depreciated

Repairs are immediately deductible. Improvements must be capitalized and depreciated – and on foreign rental property, that means over 30 or 40 years under ADS.

 

Replacing a major component of a building system, such as a boiler or furnace, is generally treated as a capital improvement – not a repair. When in doubt, ask whether the work extends the property's useful life or adapts it for a new use – if yes, it must be depreciated.

Common depreciation mistakes US expats make

Even experienced filers get foreign rental property depreciation wrong. These are the mistakes that show up most often:

• Using GDS instead of ADS – GDS is not permitted for foreign residential rental property. If GDS has been applied to past returns, that is an error that needs to be corrected.
• Depreciating the land – Land has no depreciable life. Including it in your basis overstates your deduction and creates problems when you sell.
• Incorrect basis – Failing to account for closing costs, capital improvements, or the correct FMV at inheritance produces a wrong number that compounds across every year.
• Wrong currency conversion – Using an annual average rate instead of the spot rate on the purchase date gives you an incorrect basis from day one.
• Wrong recovery period – Using 40 years for a post-2017 property, or 30 years for a pre-2018 property, is one of the most common errors TFX sees on expat returns.

What happens when you sell: depreciation recapture

Every year, depreciation is allowed or allowable; your adjusted basis goes down. This can affect your gain on sale even if you failed to claim the deduction correctly. When you sell, a lower basis means a higher taxable gain.

The depreciation portion of the gain is generally treated as unrecaptured section 1250 gain and can be taxed at a maximum rate of 25% – higher than the standard long-term capital gains rate for most expats.

The more years of depreciation you have claimed, the larger the recapture amount when you report the sale.

How depreciation fits into your US tax return

Depreciation is reported on Schedule E and directly reduces your taxable rental income for the year. Form 4562 may also be required to calculate and report depreciation, especially when property is first placed in service or when new depreciable assets are added. Schedule C applies only in narrower cases, such as when you provide substantial services to tenants or when you are operating as a real estate dealer.

As a US expat, you are required to report worldwide rental income regardless of where the property is located – a core principle of citizenship-based taxation.