What Are the Tax Implications of Owning Foreign Property or Investments
American expats often build a life in a new country by buying property like a home or creating financial stability with investments. As long as taxpayers are still U.S. citizens, their financial decisions might come with certain tax obligations.
Your first order of business should be to speak to a CPA and determine whether your properties or investments need to be disclosed to the IRS. In many cases, especially when the investment or property is worth a substantial sum, you must disclose your holdings to the IRS. If you sell the property or investment, you may be taxed on the profits as income, and you should report the sale to the IRS. Simply owning valuable property or investments might be reportable under FBAR requirements. If you are taxed on the sale of property or an investment, you might be able to claim foreign tax credits so you do not pay taxes on the same income twice.
Call our U.S. tax accountants at US Tax Help at (541) 362-9127 for help with your taxes as an American expat.
Reporting Foreign Property or Investments on Your U.S. Taxes
While living overseas, you might buy some property, make investments, and otherwise take steps to build your life broad while planning for financial security. If you remain a U.S. citizen while living overseas as an expat, you still have U.S. tax obligations.
Buying Property or Investments
You do not necessarily have to report that you have purchased a property or made an investment. The purchase alone is not taxable. However, what you do with the property or investment might determine whether you must report it on your U.S. taxes.
If the property is used for business purposes, you would have to report the income you earn from the property. For example, suppose you buy a home while living in another country and decide to rent it out to earn extra income. The purchase of the home might not be something you have to report on your taxes, but the income you earn from renting it out is definitely something you must disclose on your taxes.
How you purchase the property or investments also determines whether you must report certain information about the purchase to the IRS. Making a purchase in your name as an individual is not necessarily a taxable event. However, if you buy the property through a business or corporate entity, there might be certain tax obligations. You should speak with a CPA to make sure.
Selling Property or Investments
When you sell property or investments, you might earn income. That income must be reported on your taxes. However, reporting requirements might depend on whether you turned a profit from the sale.
People do not always sell properties or investments for more many than they paid. Unfortunately, things do not always pan out as we hope, and we sometimes sell at a loss. If you turn a profit, you may be taxed on your capital gains. If you sell at a loss, you are not taxed on the sale and may deduct the loss from your taxable income.
For example, suppose you buy an investment property in the foreign country where you live for the equivalent of $100,000. Next, suppose you sell the property for $150,000. Your initial investment of $100,000 is your base. The $50,000 profit from the sale is the capital gains that must be reported and taxed.
Alternatively, suppose you sold the investment property for less than what you paid. Perhaps you sold it for $60,000, meaning you experienced a $40,000 loss. You might be able to deduct that loss from your taxable income. Not all losses are deductible, and you should speak to an experienced CPA if this situation sounds familiar.
How Owning Property or Investments Abroad Affect Your Foreign Tax Requirements
While buying some property or investing in certain assets is not necessarily worthy of reporting on your taxes, particularly valuable assets might adhere to different rules. If your property, investments, or other assets are worth enough money, you might need to file FBAR reports.
Buying property or investing overseas might trigger Report of Foreign Bank and Financial Accounts (FBAR) requirements. You might need to report properties and investment assets if they amount to more than $10,000. This means that even if you have not yet made any money from the property or investment, you must submit an FBAR report if it is worth more than $10,000.
Real property is often worth enough to warrant FBAR reports. As such, expats often have to disclose homes or other valuable assets. If you are unsure, speak to a CPA about your finances. It might be better to err on the side of caution and report assets anyway if you are unsure about reporting requirements.
Possible Tax Breaks Regarding Foreign Investments and Property
When you file your U.S. taxes, you must report your worldwide income. This includes any income you might earn while living in a foreign country. Often, people find themselves already paying taxes on their foreign-earned income to the country where they earned the income in the first place. You can claim a foreign tax credit to avoid paying taxes to two countries on one income.
To put it differently, if you sell a property or investment and make a profit, the country you live in will likely tax that profit as part of your income. Unfortunately, the United States will try to tax it too. To avoid paying taxes twice on a single source of income, you can claim a foreign tax credit by filling out Form 1116.
You can take this tax break as a credit and reduce your tax liability or as an itemized deduction. Whichever is best depends on your specific situation and should be discussed with a CPA.
Call US Tax Help to Discuss Your Foreign Property and Investments
Contact our U.S. tax accountants at US Tax Help by calling (541) 362-9127 to ask for help with your taxes as an American expat.