When you Own Rental Property Abroad- How to Treat on Your US tax Return

When you own rental property outside of the USA  (which is required to be reported on your US income tax return) you will need to know the following to properly report it on your US taxes:

1. The lifetime its value  is depreciated most often is different from the rate in the USA.
2.  It is reported on Form 1040 schedule E, if it is not owned through a foreign partnership, corporation or foreign trust.
3. If the property is owned through a foreign corporation, trust or partnership special forms must be filed with your US personal tax return such as form 5471, 8865, 3520, etc.  Failure to file one of these forms if  required can result in a penalty of $10,000 or more.
4. The income and expenses of the rental must be reported for taxes in the same manner as a US rental property.
5. You will get a tax credit to offset your US tax on the rental income for income taxes paid the country in which the rental is located.
6. The US income tax rules for the rental apply to the property even though it as a VRBO, ARBNB, or other vacation rental.
7.  You cannot do a 1031 exchange from your rental into a US rental property or exchange a US rental property into a foreign rental property.
8. If you maintain a bank account abroad to collect rent and pay expenses you may be obligated to file Form 114 each year to report that (those) account(s). Failure to report can result in substantial penalties.

If you have questions or need further information EMAIL US FOR ANSWERS  We are US CPAs and Attorney with over 20 years experience in international taxation.

Plan Ahead for Tax Time When Renting Out Residential or Vacation Property Outside of USA

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.

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:

Renting Your Vacation Home – English | Spanish | ASL

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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 

Better Pay Your Mexican Taxes on your Mexican Rental Income

Under Mexican law,  all income generated from properties located within Mexican territory is subject to taxation, even if the owners are foreigners and even if all funds are collected in accounts located outside Mexico.   For many years it has been a major issue for both Mexican tax authorities and individuals attempting to comply.  For years a Federal Taxpayer ID was required to file and pay the tax.   In order to obtain this tax ID one needed to be a resident of Mexico.    This was lose-lose for both the authorities and the foreigners who were willing to pay but baffled by the issues involved to “get legitimate”.

After more than five years of Settlement Company® dialogue with Mexican tax officials, a resolution was made in which the foreign property owner could appoint a Mexican company to pay his or her taxes and dispense with all other formalities.  This has become reality!   Mexican authorities are now looking seriously to collect this long-neglected source of tax revenue and foreigners not only are lining up to pay but also to receive the receipts for payment of the taxes which can then be credited against taxes paid in their native country under the terms of the NAFTA treaty.  Remember! no double taxation is permitted under the terms of the treaty!

If you have a rental property in Mexico contact us for details.   ddnelson@gmail.com

MEXICO RENTAL INCOME…………….PAYING TAX IS NOW EASIER THAN EVER AND WITH STATESIDE BENEFITS!!

by Linda Jones Neil

Those who have rental properties in Mexico can now rest easy. SAT, Mexico’s Uncle Sam, has provided a straightforward and relatively simple way to declare and pay taxes on rental income for those foreigners who have long wished to be in compliance but did not know the way to do so.

As of February 2010, SAT eliminated the requirement for a taxpayer identification number (RFC) which had previously been obtained only through extreme efforts,

Now the foreign taxpayer has two options: One to obtain the taxpayer identification number (RFC), file monthly declarations whether there is income or not, and enjoy a deduction of expenses. This is Option One.

Option Two provides for the taxpayer to make a declaration when income is received, pay a flat tax and obtain a receipt to take to the tax authorities in his/her tax residence, for credit or deduction of taxes in the home country.

On any rental the owner, or his/her property managers, are responsible for collecting the IVA tax (the added value tax) which is 11% on the Baja Peninsula and the Yucatan peninsula and 16% elsewhere. Owner or property manager must also collect the state hospitality tax which is 2 to 4% of the rental amount. These taxes must be delivered to the federal and local governments, as applicable.

It is important for the foreign person with rental property in Mexico to make arrangements for payment of these taxes since penalties can be high in Mexico for non-payment and, additionally, these same tax payments and expenses can be deducted or credited against income in taxpayer’s home country.

The next part of the equation for the US taxpayer has been deciding how to declare this income and enjoy the deductions in their US returns.

Don Nelson, Attorney and Certified Public Accountant located in California reports the following regarding tax treatment for U.S. taxpayers:

• If the Mexican rental property owned in an individuals name or through a Fideicomiso, all rental income and expenses are reported on Schedule E of the form 1040.
• Allowable rental expenses are the same as for a US property.
• Management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance…ALL are deductible!
• Depreciation on a Mexican property is 40 years straight line
• Taxpayer can take a Foreign Tax Credit against the US income tax paid on the net rental income for income taxes paid in Mexico on that income.
• IVA (added value tax) collected from the renter must be included in rental income, but then deducted out so no double taxation.
• The special Vacation Home rules applicable to US rental property occupied part time by the owner is also apply to Mexican rental property.
• IN A SALE OF THE PROPERTY, net gain is taxed in the US at the applicable lower capital gains rates and Mexican ISR paid is a credit against that US tax on that profit.

For further information on the Rental Payment Program for Mexican properties, please contact: Lic. Quirino Parra: quirino.parra@settlement-co.com.

For further information on the payment of US taxes when Mexican income is involved, please contact attorney and CPA Don D. Nelson: ddnelson@gmail.com . His website is at www.taxmeless.com.

Author Linda Neil is the founder of The Settlement Company. It is the first escrow company in Mexico, and is dedicated to counseling buyers and sellers, processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located ANYWHERE in Mexico and, now, for payment of taxes on rental income for foreigners with properties in Mexico.. Ms. Neil is also licensed as a Real Estate Broker in California, is an Accredited Buyer Representative through NAR, and has over thirty five years of hands on experience in all aspects of Mexican real estate. She holds membership in AMPI, NAR and FIABCI and PROFECO Certificate 00063/96.

E-Mail; linda.neil@settlement-co.com Web Site: http://www.settlement-co.com.

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copyright 2011, Consultores Phoenix, S.C., reproduction prohibited without permission.