U.S. Investment in Overseas Real Estate
There are many reasons why our clients invest in property overseas, including privacy, portfolio diversification, tax savings, holiday home and retirement planning. They utilize the services of Moskowitz, LLP because our real estate and tax attorneys know how to best structure their international investments for maximum tax savings.
A private and secure investment
Real estate is not only a very stable investment in many foreign countries, it is also harder for U.S. creditors to attach than domestic property. An added benefit is that foreign property need not be reported to the IRS unless it is held by a foreign corporation with 10% or more U.S. ownership, a foreign partnership or LLC, or a foreign trust or estate. Even in these cases, although the value of the foreign entity is reportable, the real estate itself need not be listed individually.
A vehicle for tax savings
Investment in foreign real estate is also tax efficient. The mortgage interest rules of IRC §163(h) apply to foreign properties, allowing U.S. taxpayers to deduct up to $1.1 million in mortgage interest paid on a first and second home. Foreign property taxes are deductible, as are travel costs connected with managing investment properties overseas. You can also exclude up to $250,000 ($500,000 if married) in capital gains if you sell an overseas property that served as your primary residence for at least two out of the last five years.
Note, however, that you can’t do a 1031 exchange with foreign property and you also may be subject to double taxation. Although the U.S. generally allows for a tax credit for foreign taxes paid on net rental income and capital gains tax following a sale, this does not apply to all foreign countries.
Renting out property overseas
There are special rules regarding the reporting of rental income from overseas real estate. You don’t have to report rental income if your property was rented out for less than 14 days during the year, or if it was used for personal reasons for more than 14 days or 10% of the days it was rented out. You can deduct mortgage interest, property taxes, and travel costs, but there is no deduction for rental expenses and losses.
If you have to report rental income, you can also deduct rental expenses. In this case, your foreign rental property is basically treated the same way as domestic property, except that depreciation must be made over 40 years instead of the usual 27 ½. If you use a foreign bank account to collect rent and that account contains $10,000 or more on any given day of the calendar year, you will need to file an FBAR.
International tax law services for overseas investment
If you are a U.S. citizen or resident planning to invest in overseas real estate, or if you already own property abroad, you need top notch international tax law advisors who know real estate and tax law, both domestic and foreign. The attorneys at Moskowitz, LLP work with legal and tax professionals abroad and know how laws and regulations in other countries affect your U.S. taxes. Call us at (888) 829-3325 or (415) 394-7200.