Summertime is a time of year when people rent out their property located in a foreign country. In addition to the standard clean up and maintenance, owners need to be aware of the tax implications of residential and vacation home rentals both in and outside of USA. Most of the tax rules are the same for both.
Receiving money for the use of a dwelling also used as a taxpayer’s personal residence generally requires reporting the rental income on a tax return. It also means certain expenses become deductible to reduce the total amount of rental income that's subject to tax.
Dwelling Unit. This may be a house, an apartment, condominium, mobile home, boat, vacation home or similar property. It's possible to use more than one dwelling unit as a residence during the year.
Used as a Home. The dwelling unit is considered to be used as a residence if the taxpayer uses it for personal purposes during the tax year for more than the greater of: 14 days or 10% of the total days rented to others at a fair rental price. Rental expenses cannot be more than the rent received.
Personal Use. Personal use means use by the owner, owner’s family, friends, other property owners and their families. Personal use includes anyone paying less than a fair rental price.
Divide Expenses. Special rules generally apply to the rental of a home, apartment or other dwelling unit that is used by the taxpayer as a residence during the taxable year. Usually, rental income must be reported in full, and any expenses need to be divided between personal and business purposes. Special deduction limits apply.
How to Report. Use Schedule E to report rental income and rental expenses on Supplemental Income and Loss. Rental income may also be subject to Net Investment Income Tax. Use Schedule A to report deductible expenses for personal use on Itemized Deductions. This includes such costs as mortgage interest, property taxes and casualty losses.
Special Rules. If the dwelling unit is rented out fewer than 15 days during the year, none of the rental income is reportable and none of the rental expenses are deductible. Find out more about these rules; see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
You can get forms and publications on IRS.gov/forms at any time.
Foreign Taxes May Have to be Paid in the Country in which the property is located. Check with a local accountant. For instance in Mexico you must not only pay income taxes on the rental income but may also have to pay Value Added Taxes. Failure to register and pay can result in substantial penalties in Mexico and other countries.
Good News - You do get foreign tax credits for income taxes paid in foreign countries which will offset your US taxes on the same income dollar for dollar. Other taxes you pay may be deductible as rental expenses. Most states do not allow a foriegn tax credit on state returns.
Good News - You do get foreign tax credits for income taxes paid in foreign countries which will offset your US taxes on the same income dollar for dollar. Other taxes you pay may be deductible as rental expenses. Most states do not allow a foriegn tax credit on state returns.
Additional Resources:
- Tax Topic 415 – Renting Residential and Vacation Property
- Rental Income and Expenses – Real Estate Tax Tips
- Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? IRS
YouTube Videos:
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Email us for US tax and legal planning for the rental of your foreign property or its sale or purchase. Planning ahead can often avoid tax problems later. ddnelson@gmail.com Also visit our website at www.taxmeless.com
Email us for US tax and legal planning for the rental of your foreign property or its sale or purchase. Planning ahead can often avoid tax problems later. ddnelson@gmail.com Also visit our website at www.taxmeless.com
