Overseas Real Estate Rental Income – U.S. Tax | FBAR | FATCA (8938) | Foreign Tax Credit
When it comes to Offshore Disclosure and reporting foreign income to the United States, one of the main issues that arises for individuals is offshore rental income generated from a foreign property.
In many countries, rental income from property does not need to be reported unless it meets certain threshold requirements. Unfortunately, this can cause major confusion to individuals who are required to pay US tax when their foreign rental income is tax-free.
For example, Michelle is a Legal Permanent Resident who resides in the United States but has rental property in South Africa that earns rental income. Her only South African sourced income is the rental property and after deductions are taken, she is below the threshold required to file and pay taxes in South Africa.
In the United States, Michelle is otherwise required to file a tax return since she makes significant income. As a result, the mere fact that she is not required to report the income in South Africa does not exempt her from having to report the income under US tax return.
If Michelle has failed to report the income under US tax return it could be costly, depending on other issues such as whether she also has unreported foreign accounts and the value of what her total offshore assets are.
The following is a basic summary of important issues we often deal with involving foreign real estate income:
U.S. Tax Liability
If a person is a “U.S. Person” and is required to file a tax return (1040) in that they are either considered to be a US taxpayer for income tax purposes and/or meet the threshold requirements for filing, then the United States taxes individuals on their worldwide income. As such, it does not matter that Michelle earns the money in South Africa and that under South African law is below the threshold reporting requirements for filing and paying taxes in South Africa.
As a US person, the United States taxes her on her worldwide income and she must include all of her worldwide income on her tax return. If Michelle happened to have paid tax already in South Africa, she would generally qualify for what is called a foreign tax credit to ensure she’s not paying double tax on those earnings in the United States
Profit vs. income
Another very important distinction that is common is when a taxpayer has foreign property that earns rent income, but at the end of the day once expenses and foreign taxes are factored in there is no “profit.” Just because there is no profit does not mean there is no tax reporting requirement.
Rather, a person is required to report the gross income as well as the expenses on a Schedule E (or merely report the income if deductions will not be taken). Moreover, it is important to keep in mind that under US law the deductions and exclusions a person takes for their rental property may be different than in the country in which the property is located (for better or worse) – so just because there is no profit under foreign tax law does not mean there is no profit under US tax law.
If you have a foreign account for multiple accounts you use to deposit your foreign rents, then you may have an FBAR Reporting Requirement. An FBAR aka (FinCEN 114) is a Report of Foreign Bank and Financial Account form and is required to be filed when a person has an annual aggregate total of foreign accounts (bank account, investment account, retirement account etc.) that exceeds $10,000 at any time during the year.
Expanding from the prior paragraph involving FBARs, depending on the total amount of money you have in foreign accounts, you may also have the file an IRS “FATCA” Form 8938 (Statement of Specified Foreign Assets). Unlike the FBAR which is reported electronically and directly to the Department of Treasury, the 8938 is filed directly with your tax return and also carries significant fines and penalties if it is not filed timely.
The threshold requirements for having to file and 8938 or higher than an FBAR and will be determined by whether you file single or married filing jointly and /or whether your residence is within the United States or a foreign country.
Reporting Foreign Income and Accounts – The Basics
Offshore disclosure is a complex area of law. To that end, many clients of ours have many of the same issues, questions, or concerns regarding their failure to report and/or be in compliance.
The following is a summary:
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
We provide a reduced fee telephone consultation to all potential clients (excluding CPAs, Lawyers, and/or other Tax Professionals) so that we can answer your questions. All calls are strictly confidential and the information is covered under the attorney-client privilege (even if you decide not to retain our firm).
Call now; let us help you.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)