Tips to Avoid Common Mishaps for U.S. Expats Renting U.S. Property

Sep 14, 2017

This FBAR Wiz post gives a brief summary of some of the most common mishaps and mistakes made by U.S. expats who rent property located within the United States. It is common for Americans who own property in the U.S. to move abroad, but when they do so, they are then faced with the question of whether to sell or rent the property after their move. The answer to this perplexing question often depends on whether they are moving abroad temporarily or permanently: if they are moving overseas temporarily, if may make more sense to rent it, while if they are moving abroad permanently, they may prefer to sell up and use the proceeds to buy a home abroad. Additionally, it is common for U.S. expats to own one or more U.S. properties and use them as rental income. While every expat’s situation is different, all are subject to the same U.S. tax regime. The FBAR Wiz has previously discussed other tax issues impacting expats from different countries here. Brief Overview of U.S. Taxes for Expats U.S. expats are still required to file a United States tax return, wherever in the world they live and earn income. As such, rental income from U.S.-based properties (as well as rental income from foreign properties) should be declared on the U.S. expat's Form 1040. Thankfully, there are several exemptions that allow U.S. expats to reduce their U.S. tax liability, notably the Foreign Earned Income Exclusion, and the Foreign Tax Credit, however rental income, not being earned, can’t be excluded using the Foreign Earned Income Exclusion. In addition, taxpayers are strongly advised to check out the free FBAR Wiz app to anonymously determine if they have an obligation to report offshore assets and/or offshore accounts to the IRS. U.S. expats may also have to report their foreign bank and investment accounts by filing an FBAR (Foreign Bank Account Report), if they have a total of at least $10,000 in foreign assets and/or accounts at any time during the tax year. Understanding How the U.S. Taxes Rental Income of U.S. Expats U.S. rental income for up to three residential rental properties should be declared on the Form 1040, Schedule E. It is also important not to forget to claim for all deductions related to the rented property, such as mortgage interest, advertising, real estate taxes, management, maintenance, utilities, and even insurance. It may also be useful to claim a percentage of the property’s value as depreciation by attaching a Form 4562. It is also key to remember that many States charge income tax on income accrued within the State's borders too, so having U.S. property rental income may mean having to file a State tax return as well, depending on the tax rules of the particular State. “If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.” – IRS.   Catching Up Many expats are completely unaware that they are required to pay U.S. taxes, and upon finding out, they may have several years of U.S. back taxes to file. Thankfully there is an IRS amnesty program called the Streamlined Procedure that lets expats catch up with their U.S. taxes and FBAR filings while facing reduced penalties. They simply have to file their last three tax returns, and their last six FBARs (if applicable), pay any back taxes due (often none if they claim one or more of the available exemptions when they file their back taxes), and self-certify that their previous failure to file was "non-willful." Although "non-willful" generally refers to accidental/negligent instances of not knowing U.S. tax law, this is a term of art and you should consult an attorney to help determine if your conduct truly was "non willful" or not. The FBAR Wiz app is just a starting point.