Depreciation of Foreign Rental Property

Depreciation of Foreign Rental Property

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 property located overseas, 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 about the depreciation of foreign rental property, 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’s the Benefit of Depreciation of Foreign Rental Property?

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.

That is what makes the depreciation of foreign rental property so important.

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, included foreign rental property.

Contact our firm today for assistance with getting compliant.