Do U.S. Citizens Have to Pay Taxes on Foreign Property?

U.S. citizenship carries a tax obligation to be taxed on your worldwide income, regardless of where you live or where your assets are located. This principle extends directly to real estate owned in other countries. This means that income generated from a foreign property, such as rent, and gains realized from its sale are subject to U.S. taxation. The property itself may also be subject to U.S. informational reporting and, eventually, U.S. estate or gift taxes.

Taxation of Foreign Rental Income

All rental income from a foreign property must be reported on your U.S. tax return. This applies whether the income is from a long-term tenant or short-term vacation renters, and the gross amount is reported on Schedule E (Form 1040). A key step is converting all financial figures from the foreign currency into U.S. dollars. For rental income and expenses, the IRS permits the use of a yearly average exchange rate.

Just as with a domestic rental, you can deduct ordinary and necessary expenses. These include:

• Mortgage interest
• Foreign property taxes
• Costs of repairs and maintenance
• Insurance premiums
• Property management fees

A difference from U.S. properties is the depreciation period; foreign residential rental properties are depreciated over a 30-year period, as opposed to the 27.5-year period for U.S. properties. The net income from the property is taxed at your standard U.S. income tax rates and is not eligible for the Foreign Earned Income Exclusion.

Capital Gains Tax on the Sale of Foreign Property

When a U.S. citizen sells a foreign property, the transaction must be reported on their U.S. tax return using Schedule D and Form 8949. The tax treatment depends on how long the property was held. A holding period of more than one year qualifies for lower long-term capital gains rates, while property held for a year or less is taxed at higher ordinary income tax rates.

Calculating the gain involves specific currency conversions. The property’s cost basis—the original purchase price plus the cost of any major improvements—must be converted to U.S. dollars using the exchange rate on the date of purchase. The selling price must be converted using the exchange rate on the date of sale, which can lead to a taxable gain in U.S. dollars even if the property’s value did not increase in the local currency.

Tax relief may be available if the foreign property was used as your primary residence. The Section 121 exclusion allows a taxpayer to exclude up to $250,000 of capital gains from their income, or $500,000 for a married couple filing jointly. To qualify, you must have owned the property and used it as your main home for at least two of the five years leading up to the sale.

If the foreign property was inherited, the basis is “stepped up” to its fair market value on the date of the original owner’s death. This adjustment can substantially reduce the taxable capital gain when the heir sells the property, as any gain is calculated from this stepped-up value.

Foreign Property Reporting Requirements

Beyond paying tax, U.S. citizens have separate informational reporting obligations for their foreign assets. Failure to file these forms can lead to significant penalties, even if no tax is owed.

One requirement is the Report of Foreign Bank and Financial Accounts (FBAR), or FinCEN Form 114. An FBAR is required if you have a financial interest in or signature authority over foreign financial accounts, and the aggregate value of those accounts exceeds $10,000 at any point during the calendar year. If you deposit rental income into a foreign bank account, that account’s value contributes to the threshold.

Another form is Form 8938, Statement of Specified Foreign Financial Assets, which is filed with your annual income tax return. The reporting thresholds for Form 8938 are higher than for the FBAR and vary based on filing status and residence. For a single filer living in the U.S., the threshold is met if specified foreign assets are worth more than $50,000 on the last day of the tax year or more than $75,000 at any time.

Directly held foreign real estate is not a “specified foreign financial asset” and does not need to be reported on Form 8938. However, this changes if the property is held indirectly through a foreign entity such as a corporation or trust. In that case, your interest in the entity is a reportable asset.

Gift and Estate Tax Rules for Foreign Property

The U.S. tax system also extends to the transfer of foreign property by gift or upon death. For a U.S. citizen, their worldwide assets are subject to U.S. estate and gift tax rules, meaning the fair market value of any foreign real estate is included in the calculation of your gross estate.

If you give your foreign property to another person, the transfer is subject to U.S. gift tax rules. U.S. citizens must file a gift tax return, Form 709, for any gifts that exceed the annual gift tax exclusion amount. For 2025, this exclusion allows you to give up to $19,000 to any individual without incurring gift tax.

The lifetime exemption shields a large amount of assets from both gift and estate tax. For 2025, this exemption is $13.99 million per individual, meaning a U.S. citizen can transfer up to this amount during their lifetime or at death without owing federal tax. The value of foreign property contributes to this total, and under current law, this higher exemption amount is scheduled to decrease significantly at the end of 2025.

Claiming the Foreign Tax Credit

To prevent being taxed on the same income by both the U.S. and a foreign country, the tax code provides the Foreign Tax Credit (FTC). This credit reduces your U.S. income tax liability on a dollar-for-dollar basis for income taxes you have already paid to a foreign government. It is more advantageous than taking a deduction and is claimed using Form 1116.

Only taxes on income, war profits, and excess profits qualify for the credit. Property taxes, value-added taxes (VAT), or sales taxes are not creditable but may be deductible as an expense. All foreign tax amounts must be converted to U.S. dollars for the form.

On Form 1116, you must categorize your foreign source income into specific baskets, such as “passive category income.” Rental income and capital gains from the sale of property fall into the passive category. A separate Form 1116 may be required for each income category.

The FTC is limited to the amount of U.S. tax you would have paid on that same foreign source income. This limitation prevents the credit from offsetting U.S. tax on your U.S. source income. If the foreign taxes you paid exceed this limit in a given year, you can carry the unused credits back one year or forward for up to ten years.