Do US Citizens Have to Pay Taxes on Foreign Property?

United States citizens are taxed on their worldwide income, regardless of where they live or where the income is generated. While the U.S. does not impose a national property tax on the simple ownership of foreign real estate, activities associated with that property can create tax and reporting duties. These obligations arise from events like earning rental income or selling the property.

Taxation of Foreign Rental Income

Rental income from a foreign property is subject to U.S. income tax and must be reported on Schedule E of Form 1040. All income and expenses must be translated into U.S. dollars for reporting. Taxpayers can use the yearly average exchange rate provided by the IRS for this conversion.

Taxable income is the gross rental income minus allowable expenses. Common deductions include mortgage interest, foreign property taxes, costs for repairs and maintenance, management fees, and insurance premiums. Another deduction is depreciation. For foreign residential rental properties, the building is depreciated over a 30-year recovery period, which differs from the 27.5-year period for U.S. properties. Land is not depreciable.

To prevent double taxation, taxpayers can claim a Foreign Tax Credit for income taxes paid to a foreign country on the rental income. This credit, calculated on Form 1116, reduces U.S. income tax liability on a dollar-for-dollar basis. For example, a $2,000 tax payment to a foreign government can offset up to $2,000 of U.S. tax on that same income.

Capital Gains Tax on the Sale of Foreign Property

When a U.S. citizen sells a foreign property, any resulting profit, known as a capital gain, is subject to U.S. capital gains tax. The gain is reported on Schedule D and Form 8949. The tax applies regardless of whether the property was for personal, rental, or investment use, and the holding period determines the tax rate.

Calculating the gain requires converting foreign currency transactions into U.S. dollars. The adjusted basis, which is the purchase price plus improvements, is converted using the exchange rate on the date of purchase. The sale proceeds are converted using the exchange rate on the date of the sale. The difference between these amounts is the taxable gain or loss.

If a mortgage denominated in a foreign currency is paid off as part of the sale, currency fluctuations can create a separate taxable gain or loss. This is treated as ordinary income or loss, not a capital gain.

Taxpayers may be able to exclude a portion of the gain if the property was their primary residence. Under tax code Section 121, a person who owned and used the property as their main home for at least two of the five years before the sale can exclude up to $250,000 of the gain. This exclusion increases to $500,000 for married couples filing a joint return.

A Foreign Tax Credit may also be claimed for capital gains taxes paid to a foreign country on the sale, which helps prevent the same gain from being taxed twice.

Required Information and Reporting Forms

Beyond paying taxes, U.S. citizens have specific information reporting requirements for their foreign assets. These forms are filed separately from the income tax return and carry substantial penalties for non-compliance.

FinCEN Form 114 (FBAR)

A U.S. person with a financial interest in or signature authority over foreign financial accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of those accounts exceeds $10,000 at any point during the calendar year. This includes foreign bank accounts used to receive rental income or hold sale proceeds. The form requires the bank’s name, address, account number, and the maximum account value during the year in U.S. dollars. FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN), not the IRS.

IRS Form 8938 (Statement of Specified Foreign Financial Assets)

IRS Form 8938 is filed with the annual income tax return and has higher reporting thresholds that vary based on filing status and residence. For a single taxpayer living in the U.S., the threshold is met if specified foreign financial assets are worth more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year. These thresholds are higher for married couples and for taxpayers living abroad.

Directly owned foreign real estate is not a “specified foreign financial asset” and is not reported on Form 8938. However, if the property is held indirectly through a foreign entity like a corporation, partnership, or trust, the interest in that entity is a reportable asset. In this case, the value of the interest in the entity must be reported if the filing thresholds are met.

Other Potential Forms

The structure of property ownership can trigger other reporting obligations. Holding property through a foreign corporation may require filing Form 5471. Similarly, ownership through a foreign trust could require filing Form 3520, which is also used to report large gifts or inheritances from foreign persons exceeding $100,000. Failure to file these informational returns can lead to penalties starting at $10,000 per form per year.

Gift and Estate Tax Considerations

The transfer of foreign property, either as a gift or as part of an estate, is subject to U.S. tax rules. For U.S. citizens, their worldwide assets, including any real estate located in another country, are included in their estate for U.S. estate tax purposes. The tax is imposed on the person giving the gift or on the estate of the deceased, not the recipient.

The U.S. provides a lifetime gift and estate tax exemption, which is $13.99 million per individual for 2025. This means a citizen can transfer up to this amount in assets, both domestic and foreign, during their lifetime or at death without incurring federal gift or estate tax.

When a U.S. citizen gives foreign property as a gift, its value is determined at the time of the transfer. If the value of a gift to a single recipient exceeds the annual gift tax exclusion of $19,000, the donor must file Form 709. Filing this form does not necessarily mean tax is due; it simply reports the gift against the lifetime exemption amount.