US Taxation of Foreign Real Estate

The Core Rule: US Tax Residency Drives Taxation

For US tax purposes, who you are at the time income arises matters more than where the property is located.

US tax residents

Include:

• US citizens (regardless of residence)
• Green card holders
• Foreign nationals who meet the Substantial Presence Test

US tax residents are generally taxed on:

• worldwide income, including foreign property income and gains.

Non-resident aliens (NRAs)

Are generally taxed only on:

• U.S.-source income, and
• specific US real estate rules (not foreign property).

This distinction is critical.

Foreign real estate becomes a US tax issue only when the owner is treated as a US tax resident.

Foreign Property While You Are a US Tax Resident

Once someone is a US tax resident:

• rental income from foreign property is reportable,
• expenses may be deductible subject to US rules,
• gains on sale are generally taxable,
• foreign tax credits may apply,
• reporting obligations increase.

This applies even if:

• the property was purchased long before US residency,
• the property is mortgaged abroad,
• the property is never remitted to the U.S.,
• the income stays in a foreign bank account.

The US taxes income - not cash movement.

Rental Income From Foreign Property

Foreign rental income is one of the most common issues for expats and inbound residents.

General treatment

For US tax residents:

• gross rental income is reportable,
• expenses may be deductible,
• net income is taxable.

Common deductible expenses may include:

• mortgage interest,
• property taxes (subject to limitations),
• repairs and maintenance,
• insurance,
• management fees,
• depreciation (using US rules).

Important nuance:

• US depreciation rules may differ from local rules.
• Depreciation may apply even if not claimed locally.
• Currency conversion applies to both income and expenses.

Rental income calculations are done in USD, which can materially affect results.

Currency Effects on Rental Income

Foreign property income is earned in a foreign currency, but US tax reporting requires:

• conversion of income into USD,
• conversion of expenses into USD,
• use of appropriate exchange rates.

This means:

• currency movements can increase or reduce taxable income,
• a “break-even” rental locally may produce taxable income in the U.S.,
• FX volatility introduces an additional layer of complexity.

Currency is not a footnote - it is part of the tax calculation.

Capital Gains on the Sale of Foreign Property

When foreign property is sold while the owner is a US tax resident:

• capital gains are generally taxable in the U.S.,
• regardless of where the property is located,
• regardless of where sale proceeds are held.

Cost basis

The US generally uses:

• original purchase price,
• plus capital improvements,
• minus depreciation claimed or allowable.

There is no automatic step-up in basis when someone becomes a US tax resident.

This can result in:

• taxation of gains that accrued before US residency,
• differences between US and local gain calculations.

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Primary Residence vs Investment Property

Local countries often provide:

• principal residence exemptions,
• partial relief on sale,
• time-based exemptions.

The US does not automatically recognise foreign exemptions.

While certain US exclusions may apply to primary residences, they:

• have specific requirements,
• are subject to limits,
• depend on use and ownership tests.

Foreign primary residence treatment must be reviewed carefully under US rules.

Foreign Property and Double Taxation

Foreign property is often taxed in:

• the country where the property is located, and
• the US (for US tax residents).

This creates potential double taxation.

Relief may come from:

• foreign tax credits,
• tax treaties,
• timing of recognition,
• classification of income.

However:

• not all foreign taxes are creditable,
• timing mismatches are common,
• treaty coverage varies.

Double taxation relief is mechanical, not automatic.

Tax Treaties and Foreign Property

Tax treaties may:

• assign taxing rights,
• clarify whether gains are taxed where the property is located,
• allow credits in the residence country,
• reduce double taxation.

Most treaties:

• allow the country where the property is located to tax the gain,
• allow the residence country (e.g., U.S.) to also tax, with credits.

Treaty language differs by country and must be read carefully.

Foreign Property Owned Before Becoming a US Resident

This is one of the most common inbound expat issues.

When a foreign national becomes a US tax resident:

• foreign property does not receive a fresh start for US purposes,
• historical cost basis remains relevant,
• pre-residency appreciation may still be taxed.

Many people assume:

“The US will only tax gains from when I arrived.”

That is often incorrect.

Why Foreign Property Requires Proactive Awareness

Foreign real estate is rarely a “set and forget” asset in a cross-border life.

It interacts with:

• residency changes,
• retirement planning,
• estate planning,
• currency exposure,
• long-term cash flow needs,
• reporting obligations.

The tax outcome is usually determined years before the sale, by:

• purchase decisions,
• documentation quality,
• residency timing,
• structural choices.

Selling Foreign Property Before vs After Becoming a US Tax Resident

One of the most consequential decisions involving foreign property is when it is sold relative to US tax residency.

Selling Before Becoming a US Tax Resident

If a foreign national sells property before becoming a US tax resident:

• the US generally does not tax the gain,
• home-country tax rules apply,
• US reporting is typically not required,
• cost basis and depreciation rules remain local.

For inbound residents, this timing difference alone can materially change outcomes.

Selling After Becoming a US Tax Resident

If the sale occurs after US tax residency begins:

• the gain is generally taxable in the U.S.,
• foreign tax may also apply,
• foreign tax credits may or may not fully offset US tax,
• currency conversion affects the reported gain.

This distinction is often discovered too late.

Selling Foreign Property After Leaving the United States

For individuals who were previously US tax residents and later leave:

• future taxation depends on whether US tax residency has ended,
• citizenship status matters,
• green-card relinquishment matters,
• timing of sale matters.

US Citizens

US citizens remain taxable on worldwide gains regardless of where they live.

Selling foreign property after leaving the US does not remove US capital gains tax exposure.

Foreign Nationals

Once a foreign national becomes a non-resident alien:

• foreign property gains are generally outside US taxation,
• provided no US residency remains,
• provided no special US rules apply.

Residency status at the time of sale is decisive.

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Inherited Foreign Property

Foreign property is often inherited rather than purchased.

Important considerations include:

• how the US determines cost basis,
• whether a step-up applies,
• whether the inheritance is taxable locally,
• reporting requirements for foreign inheritances.

US treatment

For US tax residents:

• inherited property typically receives a step-up in basis to fair market value at death,
• this may differ from local rules,
• documentation is critical.

Reporting

Large foreign inheritances may trigger:

• information reporting requirements,
• even if no US income tax is due.

Gifted Foreign Property

Gifts of foreign property introduce additional complexity.

Key considerations:

• determining cost basis (often carries over),
• potential reporting requirements,
• local gift tax rules,
• US reporting obligations for foreign gifts.

Gifted property often leads to unexpected capital gains exposure later.

Depreciation and Depreciation Recapture

Depreciation is frequently misunderstood in an international context.

For US tax purposes:

• depreciation may be allowable even if not claimed,
• depreciation reduces cost basis,
• depreciation recapture may apply on sale.

This means:

• failing to claim depreciation does not always avoid its impact,
• depreciation recapture may increase taxable income at sale.

Local systems may treat depreciation differently.

Foreign Mortgages and Interest

Foreign property often has foreign mortgages.

Important points:

• interest may be deductible under US rules (subject to limitations),
• currency conversion applies,
• local interest rules may differ,
• exchange-rate movements affect calculations.

Mortgage structure can influence net taxable income.

Foreign Property Held Through Entities

Foreign property may be owned through:

• companies,
• partnerships,
• trusts,
• family structures.

US tax treatment depends on:

• entity classification,
• transparency for tax purposes,
• attribution rules,
• reporting obligations.

Entity-owned property often introduces:

• additional reporting,
• different gain characterisation,
• compliance complexity.

Foreign Property and Estate Planning

Foreign property intersects with estate planning.

Considerations include:

• US estate tax exposure,
• foreign inheritance tax,
• treaty coverage,
• ownership structure,
• beneficiary planning.

Foreign real estate is rarely isolated from broader estate considerations.

Common Misconceptions About Foreign Property and US Tax

Some recurring assumptions that cause problems:

• “Foreign property isn’t taxable in the U.S.”
• “The US only taxes US real estate.”
• “My cost basis resets when I move.”
• “Currency doesn’t affect my gain.”
• “Selling after leaving the US solves it.”

None of these are universally true.

Why Foreign Property Requires Integrated Planning

Foreign property should be evaluated alongside:

• US retirement accounts,
• foreign pensions,
• investment portfolios,
• residency plans,
• currency exposure,
• estate considerations.

Looking at property in isolation is rarely effective.

Hypothetical Cross-Border Property Scenarios

The following scenarios are hypothetical and for educational purposes only. They do not represent actual clients or outcomes.

Scenario 1 - US Citizen Renting Property Abroad

An American citizen lives overseas and rents out a property purchased years earlier.

Key considerations:

• Rental income is reportable in the U.S.
• Expenses may be deductible under US rules.
• Depreciation may apply using US methods.
• Currency conversion affects net taxable income.
• Local tax paid may be creditable, depending on circumstances.

Scenario 2 - Inbound Resident With Long-Held Foreign Property

A foreign national moves to the US and becomes a tax resident, then later sells property held for many years.

Key considerations:

• US taxation generally applies to the full gain.
• Cost basis typically carries forward.
• Local exemptions may not apply in the U.S.
• Currency movements can materially change the reported gain.
• Foreign tax credits may reduce, but not always eliminate, double taxation.

Scenario 3 - Sale After Leaving the U.S.

A foreign national leaves the U.S., becomes a non-resident alien, and later sells foreign property.

Key considerations:

• US tax generally does not apply once non-resident status is established.
• Local country rules govern the gain.
• Citizenship status is decisive (US citizens remain taxable).

Scenario 4 - Inherited Foreign Property

A US tax resident inherits foreign property.

Key considerations:

• A step-up in basis may apply under US rules.
• Documentation of fair market value at death is essential.
• Local inheritance taxes may still apply.
• Reporting obligations may exist even if no US income tax is due.

Practical Checklist for Foreign Property Owners

Before making decisions involving foreign real estate, individuals may wish to confirm:

• Their US tax residency status.
• Whether the property generates rental income.
• How income and expenses must be converted to USD.
• Whether depreciation applies under US rules.
• Original cost basis and capital improvements.
• How long the property has been held.
• Whether a tax treaty applies.
• Whether foreign tax may be creditable in the U.S.
• Whether ownership is direct or through an entity.
• How property fits into broader retirement and estate planning.

This checklist helps frame analysis but does not replace professional advice.

How Skybound Wealth USA Assists With Foreign Property Considerations

Skybound Wealth USA assists individuals with:

• understanding how US tax rules apply to foreign real estate,
• evaluating rental income and capital gains in a cross-border context,
• coordinating foreign property considerations with retirement and investment planning,
• integrating currency exposure into long-term projections using MoneyMap,
• supporting discussions with tax professionals where appropriate,
• helping globally mobile families understand how property fits into their overall financial picture.

Any recommendations depend entirely on individual circumstances.

Next Steps

If you own property outside the United States and your life or residency spans multiple countries, understanding how US tax rules apply before income is earned or a sale occurs can reduce uncertainty and incorrect assumptions.

You may schedule a discussion with Skybound Wealth USA to review how foreign property considerations fit into your broader planning.

Important Disclosures

This material is provided for general informational purposes only and does not constitute personalised financial, tax, or legal advice. Tax rules, treaties, depreciation methods, and reporting requirements may change and vary by individual circumstances. Hypothetical examples are for illustration only and do not represent actual client outcomes.

Past performance does not predict future results. Skybound Wealth Management USA, LLC is an SEC-registered investment adviser. Registration does not imply any specific level of skill or training. Please refer to Form ADV Part 2A, Part 2B, and Form CRS for full disclosures.