Tax Implications of Buying Property Overseas

US citizens and resident aliens are subject to US tax on their worldwide income, a principle that extends to real estate owned abroad. Purchasing, owning, and selling a foreign property involves a complex interaction between US and foreign tax laws. Each stage, from acquisition to sale, has distinct US tax consequences, and financial activities like earning rental income or using a foreign mortgage trigger specific reporting requirements.

Tax Implications of Acquiring the Property

The purchase of foreign real estate is not a taxable event in the US, but it establishes the property’s cost basis for future tax purposes. This basis is the starting point for calculating any gain or loss when the property is sold. The initial cost basis must be determined in US dollars by converting the purchase price using the exchange rate on the date of purchase.

All allowable acquisition costs should be added to this amount. These costs can include:

• Settlement fees
• Legal and recording fees
• Title insurance
• Real estate taxes paid on behalf of the seller at closing

Foreign taxes on property acquisitions, such as stamp duties or transfer taxes, are not deductible in the year paid. Instead, they are added to the property’s cost basis. Maintaining meticulous records of the purchase price, all associated costs, and the exchange rates used is necessary for accurate tax reporting.

Annual US Reporting Requirements for Ownership

Ownership of foreign property can trigger annual reporting obligations to the US government, even if it generates no income. These requirements focus on transparency, and failure to file the required informational returns can lead to penalties starting at $10,000 per form. The structure of ownership is a determining factor, as holding property through a foreign entity like a corporation or trust involves more complex reporting than holding it directly.

Form 8938 (Statement of Specified Foreign Financial Assets)

Direct ownership of foreign real estate is not reported on Form 8938. However, if the property is held through a foreign entity, the interest in that entity is a “specified foreign financial asset” and must be reported if value thresholds are met. The property’s value is included when determining the total asset value for reporting.

The requirement to file Form 8938 is triggered when the total value of specified foreign financial assets exceeds certain thresholds, which vary by filing status and residence. For a single taxpayer living abroad, the threshold is met if assets are worth more than $200,000 on the last day of the year or more than $300,000 at any point. For married couples filing jointly abroad, these thresholds are $400,000 and $600,000, respectively.

FinCEN Form 114 (FBAR)

Foreign property itself is not a reportable asset on the Report of Foreign Bank and Financial Accounts (FBAR). However, any foreign bank account associated with the property is reportable. Owners often open a local bank account to manage property finances, such as paying costs or collecting rent.

If the aggregate value of all of a taxpayer’s foreign financial accounts exceeds $10,000 at any point during the year, an FBAR must be filed electronically with the Financial Crimes Enforcement Network (FinCEN). The FBAR is separate from the income tax return and has a different filing deadline. Penalties for failing to file an FBAR when required are severe.

Forms for Foreign Entities

When foreign property is held through a legal entity, additional reporting forms are often required. If the property is owned by a foreign corporation, Form 5471 may be necessary if a US person owns 10% or more of the corporation or if it is a “controlled foreign corporation” (CFC), meaning US shareholders own more than 50% of it.

If the property is held in a foreign partnership, Form 8865 is the relevant form. Filing is required if a US person controls the partnership (owns more than a 50% interest) or owns a 10% or greater interest in a partnership controlled by US persons. Holding property through a foreign trust can trigger the need for Form 3520 and Form 3520-A, which report transactions with and ownership of foreign trusts. The complexity of these forms means professional guidance is often necessary for compliance.

Taxation of Foreign Rental Income

US citizens and residents who earn income from renting out a foreign property must report that income to the IRS. Rental profits from an overseas property are taxable in the same way as income from a domestic rental and are reported on Schedule E of Form 1040. To calculate net taxable income, owners can deduct expenses like mortgage interest, foreign property taxes, maintenance, and insurance, with all figures converted to US dollars.

While US residential rental property is depreciated over 27.5 years, the IRS requires foreign residential rental properties to be depreciated over 30 years. This can result in slightly higher taxable income from a foreign rental compared to a domestic one in the early years.

To prevent double taxation, taxpayers can claim a Foreign Tax Credit by filing Form 1116. This credit reduces US income tax liability on a dollar-for-dollar basis for income taxes already paid to the foreign government on the rental profits. This rental income is considered “passive category income” for the credit calculation.

Tax Consequences of Selling Foreign Property

When a US person sells a foreign property, the transaction must be reported on their US tax return, and any profit is subject to US capital gains tax. The gain or loss is calculated by subtracting the property’s adjusted basis from the sale price. Both figures must be expressed in US dollars, using exchange rates from different points in time.

The sale price is converted to USD using the exchange rate on the sale date. The adjusted basis begins with the original purchase price, converted to USD using the exchange rate on the acquisition date. To this, one adds the USD value of capital improvements and subtracts any depreciation claimed if the property was rented.

If the property was held for more than one year, the profit is a long-term capital gain taxed at preferential rates. If held for a year or less, it is a short-term capital gain taxed at ordinary income rates.

A separate taxable event can occur if the property was financed with a foreign currency mortgage. If the US dollar strengthens against the foreign currency between the loan date and repayment date, a taxable currency gain is realized and taxed as ordinary income. Conversely, a currency loss on the mortgage repayment is not deductible for personal property. If capital gains taxes were paid to the foreign country, the taxpayer can use the Foreign Tax Credit to offset the US tax liability.

Gifting and Estate Tax Considerations

The transfer of foreign property through a gift or estate is subject to US gift and estate tax, as these taxes apply to a US person’s worldwide assets. When a US person gifts a foreign property, the transaction must be reported on Form 709 if the gift’s value exceeds the annual exclusion amount, which is $19,000 per recipient for 2025.

A gift valued above this amount requires filing Form 709, even if no tax is due because of the lifetime gift and estate tax exemption. For 2025, this exemption is $13.99 million per individual. A reported taxable gift reduces the lifetime exemption available to shelter future gifts or the final estate, and any value exceeding the exemption is taxed at rates up to 40%.

Upon the death of a US citizen, the fair market value of their worldwide estate, including foreign real estate, is calculated for US estate tax purposes on Form 706. If the foreign country imposes its own inheritance or death taxes, the estate may be able to claim a foreign death tax credit to reduce the potential for double taxation.