Depreciation of Foreign Rental Property
Depreciation of Foreign Rental Property & the IRS: While U.S. Person taxpayers are subject to taxation on their worldwide income, the IRS has also developed various methods to limit double taxation and reduce overall net effective tax liability. With foreign rental property, the IRS tax rules allow for the depreciation of foreign property. The IRS tax rules for depreciating foreign rental property are different than U.S. properties.
Common questions we receive, include:
- What is depreciation?
- Can I depreciate the whole house?
- What do I do about the land?
- How do I know what portion is structure?
- Do I use the value on the date of purchase?
- Do I use market or assessed value?
What is Rental Property Depreciation?
One benefit that the U.S. tax system provides to both U.S. and foreign rental property — that many other countries do not provide — is the idea of depreciation.
In other words, a person can “depreciate” the value of a property/residence structure or “improvements” when it is being used for rental purposes, in order to (temporarily) reduce the gross income.
It is “temporary,” because generally when the property is sold, the accumulated depreciation is subtracted from the basis so that an additional tax is paid back (but that may also be limited based on certain exceptions, exclusions and limitations.)
Only the value of structure can be depreciated, not the value of the land, since land is not “depreciable.”
Example of How is Foreign Rental Property Depreciated?
Matthew owns a foreign property worth $600,000.
- $400,000 is considered structure; and
- $200,000 is considered land
Matthew can depreciate (foreign) property over either 30-years or 40-years depending on whether it is residential or non-residential foreign rental property
Therefore, Matthew can depreciate the property either $13,333 (30-years) or $10,000 (40-years).
*Prior to 2018, depreciation of foreign residential property was limited to 40-years.
What is the Immediate Benefit of Depreciation?
If Matthew had a rental property generating $14,000 per year, with $4000 in expenses and property tax. If he could also take the depreciation of $10,000 his net income would be zero which means there is no tax on the income $14,000 income he generated.
Non-Compliance with U.S. Tax Law
Whether it is because you did not you had to report foreign rental income, were below the threshold for filing in a foreign country, and/or have other unreported income, accounts, investments or assets – we can help.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.