US TAX RULES GOVERNING FOREIGN REAL ESTATE OWNERSHIP

If you own real estate abroad the US income tax rules with respect to that property are almost the same as if the property were located in the US. On your U.S. tax return you would depreciate the property and follow the  the same rules with respect to income and expenses as you would on a property located in the USA.    Owning the property alone does not require you to file any special forms.  However, some additional new forms may be required depending on your operation of the property and any foreign entities which may be used to hold title to the property.

If the property is your primary persona residence, and you live in it full time 2 out of the past five years you can claim the sale of personal residence  gain exclusion on the property ($250,000 if single or $500,000) if married and pay no taxes so long as your gain is less than that amount. However, if the real estate is a second home or rental property, you may not escape taxation on the sale of the property by using a tax free 1031 exchange. Foreign properties are not eligible under this code section.

If your foreign real estate is a rental property, the  rental income and expenses must be reported on your Form 1040 using schedule E.  The depreciable building portion of your tax basis in the property must be depreciated over a 40 year straight line period.  Land cost is not depreciable.  The fact the property does not produce a profit does not exempt you from putting it on your US tax return.  You can offset any foreign income taxes paid on rental profits or profit on sale against your US tax on that same taxable gain.

If you maintain a tax domicile in a US state, you must also report this foreign rental property or take your deductions on your personal foreign real estate on your state tax return. States in general do not allow foreign tax credits. Rental income is not eligible for the foreign earned income exclusion.

In some countries such as Costa Rica, title to all real estate is held through a
Costa Rican corporation. You must report you ownership in this foreign corporation as well and you foreign bank accounts if applicable under the rules governing form TDF 90-22.1

The following additional forms may be required if you own a foreign property depending on the manner title is held and how the property is operated:

• Form 5471- For foreign corporations with more than 10% US owners.

• Form TDF 90.22-1- To be filed if any time during the year you had signature authority or an ownership interest one or more foreign bank accounts, financial accounts, debit card accounts, which together had at any time during the year more than $10,000 in them (collectively)

• Form 3520 and 3520A -Filed if you are a grantor, grantee or in someway connected with a foreign trust

• Form 926-Filed when property is transferred to a foreign corporation.

• Form 8865 Filed for foreign partnerships

• Form 8858 - Filed  or Foreign Disregarded Entities

Failure to file most of these forms can result  in the IRS imposing severe penalties unless you can show "reasonable cause" which is often difficult to prove.