It’s no secret that El Paso borders Mexico. Have you ever thought about buying a property abroad? Whether you’re looking to relax at a villa on the beachy coasts of Mexico or enjoy the beautiful architecture in a place of your own in Europe, there’s
no denying the charm that living abroad can bring. However, no matter if you want a vacation home or are planning to retire comfortably, there’s no forgetting that you’ll have to deal with proper planning. That includes how a foreign property purchase
might impact your taxes, what ownership might look like, how legal structures work, and more. To make the moving abroad process slightly less stressful for you, we’ll break down all you need to know and more about how you can acquire the best foreign
real estate abroad.
When it comes to a property, you’ll have to keep taxes in mind no matter where you choose to reside. In the case of a foreign property, the good news is that the purchase doesn’t need to be
reported on your US expat taxes. However, what does need to be reported is the resulting gain or loss in the event that you sell the property. This includes any rental income that you earn should you choose to turn the property into a long-term investment
opportunity. By keeping this in mind, don’t forget to keep all records of the sale and any costs that are associated with it in good hands.
Your Benefits & Deductions
Now that you know the gist of how taxes for foreign properties work, it’s time to take a look at where your benefits and deductions may apply.
A Second Home
In general, a lot of the US tax laws revolve around how you choose to use the property. If it’s for your own personal enjoyment as a second home, then you’re eligible for a mortgage interest deduction. As long as you’ve purchased the property after 2019,
then you can deduct the interest that you paid on the first $750,000 of qualified mortgage debt for your first and second homes. That amount increases to $375,000 if you’re married and have filed separately.
But what if you’re renting out the property to the local residents? The rules will function just a little differently. In a nutshell, if you rent out the home for a maximum of two weeks every year, you don’t have to report that income to the Internal
Revenue Service. You can additionally deduct mortgage interest because it’s still considered a second residence.
On the other hand, if you do rent out for more than two weeks, the IRS will view the property as a functioning business. That means you’ll have to report all of your rental earnings, but on the plus side, you’ll be eligible to write off plenty of rental
expenses such as mortgage interest, foreign property taxes, marketing expenses, utilities, insurance premiums, and more.
Selling the Home
Let’s say you’ve already had the trip of a lifetime living abroad and you’re ready for your next exciting chapter in life. You’re now prepared to sell your property abroad, so what benefits and considerations do you have to keep in mind?
The main benefit is that if the home has qualified as your primary residence, meaning that you’ve lived in it for at least two of the last five years, then you can write off more than $250,000 of capital gains from the final sale. That amount increases
to $500,000 if you’re part of a married couple. If the property isn’t your primary residence, then this benefit doesn’t apply to you and you’ll still be required to pay capital gains taxes.
In the event that you might want to “switch” your foreign property for another “like-kind” property, you can take advantage of the US Code Section 1031. Doing some research into this code will possibly allow you to defer paying your capital gains and
Depending on where you decide to live, you might be required to pay taxes to the country itself if you utilize the property for rental income. In other words, this process is called double taxation. Luckily, you can avoid having to pay extra as long as
you opt in for a tax credit on your US tax return for any net rental income taxes you paid for the foreign country. Keep in mind however, that there is a maximum on the tax credit you can claim.
General Transaction Guidelines
Feeling smarter about US expat taxes abroad already? To top it all off, here are some general guidelines and suggestions to keep in mind as you delve deeper into the foreign real estate process.
Research the Local Country
As Americans, it’s sometimes a privilege for us to rely on how US transactions work. That’s why you’ll have to put in the effort and time to learn about the real estate laws and insurance requirements of whatever country you’re excited about living in.
The first piece of advice that flies across the board is that you should open up a bank account in that country to streamline the property tax and mortgage payment process. That will involve filling out the required paperwork, which includes completing
the FBAR, or Foreign Bank Account Report, once your account exceeds $10,000.
Keep Exchange Rates in Mind
You might already have mortgage amounts and property prices locked in mind, but you might be forgetting to factor foreign exchange rates and hidden fees into the equation. That’s why it’s advisable to hire a personal broker. Their knowledge will help
fill the gaps in your knowledge and help you save as much money as possible throughout your transaction.
Moving abroad can be hard, but it doesn’t need to be overly stressful or painful. As you do your due diligence and research the laws and taxes applicable to your dream foreign country, you’ll be all set to go. Here at Brian Burds, we’re eager to help
with any questions you might have about foreign real estate. In general, because foreign property ownership and tax rules are complex and constantly changing, it’s advisable that you hire a skilled tax accountant and/or real estate attorney both in the
US and abroad. That way, you’ll never feel truly alone.