As we discussed numerous times on this website, the United States taxes U.S. citizens, Legal Permanent Residents and Foreign Nationals who meet the Substantial Presence Test on their worldwide income.
Generally, if you fall into either of these three aforementioned categories then it does not matter where you reside, you are subject to US tax on your foreign income – including foreign rental income.
Do I have to report Income that I earn on an Overseas Property?
Yes. As absurd as it may sound, even income that was earned overseas must be reported. If you already paid income tax overseas then you do not have to pay that tax again in the United States. Rather, you can claim a foreign tax credit (1116) for the amount you already paid.
**Since it is self-employment income it generally does not qualify for the foreign earned income exclusion (2555).
Do I still get the same deductions I would get if it was a US property?
Yes, with certain caveats. You are still entitled to take many of the same deductions that you would take for U.S. property, including interest payments on the mortgage, property tax deductions and depreciation. Keep in mind that when it comes to depreciation, properties are depreciated over a 40 year period as opposed to a shorter period of time if the property is located in the United States.
What if I did not report this income?
If you did not report the income, you should consider entering into one of the offshore disclosure programs. If the failure to report income was intentional, then you will want to enter into the Offshore Voluntary Disclosure Program (OVDP), pay any outstanding penalties, and have the matter resolved. For the traditional OVDP program you will have to pay taxes due, along with the penalty on the income tax and a penalty on the value of the property.
Alternatively, if your failure to report income was unintentional then while you still have to report the income and pay tax on the income, you do not have to pay penalty on the value of the home or other property. (which can result in a LARGE tax savings)
As long as your actions were not willful then you will often qualify for the streamlined program – in which the penalty amount is significantly less than in the OVDP program. Under the streamlined program, the penalty is limited to accounts which we have to be listed on the FBAR and/or 8938.
Since a rental property owned by an individual is not required to be listed on either the FBAR and/or 8938, it will not be computed into the penalty which furthers reduces any outstanding money due to the IRS.
Please keep the following issues in mind:
- If the IRS finds you before you have a chance to enter the program you are precluded from entering either program.
- If you are audited for any reason, then you are disqualified from entering either program.
- Finally, the IRS can withdraw these programs at any time and/or raise the penalty amount at any time they generally raise the penalty each year.
Please refer to Golding & Golding, Golding International Tax and/or Golding Tax Solutions, or for more information, and/or contact us at (800) 776-8264 or firstname.lastname@example.org
We have office locations in Orange County (Newport Beach and Irvine), Pasadena, Glendale/Burbank, as well as satellite locations in Riverside, Long Beach, Las Vegas, and Scottsdale, AZ. We also have access to offices throughout the United States and have represented clients throughout the U.S. with assets in more than 25 different countries!
SEAN M. GOLDING, Board-Certified Tax Law Specialist
Sean M. Golding is one of only a few attorneys licensed in both New York & California and has a Master’s degree in Tax Law. He has accumulated 15 years of legal experience , the highest credential awarded by the IRS.
Sean is also a contributing author to the NOLO book series on Taxation and Audit related matters.
He represents clients worldwide in matters involving U.S. and International Tax, Corporate Law, Employer Counseling, and Estate Planning. Sean’s clients include U.S. and foreign businesses and citizens living throughout the states, as well as abroad. Past and current clients reside in Afghanistan, Australia, Austria, Bulgaria, Canada, Cayman Islands, China, Germany Hong Kong, India, Indonesia, Iraq, Japan, Korea, Malaysia, Mexico, Morocco, Nicaragua, Pakistan, Philippines, Singapore, Switzerland, South Africa, and Taiwan.
Sean graduated from one of the nation’s Top Master of Tax Law Programs at the University of Denver, where he also received his Bachelor’s degree. He worked his way through school and earned Dean’s List distinction at both Whittier and DU.
He is a partner in the tax firms of Golding & Golding, Golding International Tax and/or Golding Tax Solutions.