U.S. Taxpayer Reporting Requirements for Foreign Income Producing Real Estate
U.S. taxpayers, who include U.S. Citizens or resident aliens, must report worldwide income from whatever source, subject to the same income tax filing requirements that apply to U.S. Citizens or resident aliens living in the U.S. This worldwide income reporting requirement also applies to rental proceeds generated by real estate the taxpayer owns and rents in a foreign country. A U.S. Taxpayer also must report on his or her U.S. Federal Income Tax Return the sale of real estate located in a foreign country.
A U.S. taxpayer that collects rental income from foreign real estate must report this income on Schedule E, Supplemental Income and Loss. Schedule E asks for not only the rents received from the rental property, but also allows for deductions of many expenses for the property, such as repairs and mortgage interest paid. If the taxpayer claims depreciation expenses of the rental property, the taxpayer may be required to file Form 4562, Depreciation and Amortization.
If the Schedule E shows a loss after deducting the allowable expenses from your rental income, complex passive activity loss limitations come into play in filing Form 8582, Passive Activity Loss Limitations. Whether you can use the real estate loss to offset your other income depends on whether the real estate rental is considered a “passive activity.” Generally, rental real estate is a passive activity, unless the taxpayer can meet certain qualifications to consider the rental activity as active.
Ownership of specified foreign assets, such as foreign bank accounts, often triggers certain tax reporting requirements. For example, a U.S. taxpayer who owns a foreign account must file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. Many taxpayers will also be required to file a Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return depending on some specific threshold values.
Ownership of real estate generally does not trigger these additional reporting requirements. However, if the real estate is held through a foreign entity, such as a trust or estate, then the foreign rental property must be reported on Form 8938, subject to the threshold values. Additional reporting requirements come into play as well if the real estate is held through a trust or estate, including completing Part III of Schedule B, Interest and Ordinary Dividends.
Failure to report your foreign rental income, to accurately report the income on your tax return, or to complete Form 8938 when necessary could expose the taxpayer to many penalties, including a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.
The reporting requirements for foreign rental real estate can become very complex and advanced for most taxpayers. U.S. taxpayers who own income-generating real estate in a foreign country would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing foreign real estate.
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