It is a recurring theme among many Americans who live abroad to rent your home while you travel. Many people do not want to give up their residence because they plan to return in the near future or because they want to earn some extra money on the side. Additionally, letting your home be rented out is an excellent way to preserve the equity that has accrued over time while also making the home profitable.
In the event that you are a US citizen living overseas and have people who rent out your home in the United States, you will be obligated to report several things to the Internal Revenue Service (IRS) every year. We’ll go into greater detail about this later.
Tax Consequences to Selling a House
While it’s easy to understand that you don’t want to give up your US residence while you’re living in another country, renting out your home comes with its own set of tax commitments. One of them is the requirement to retrieve all depreciation from the time the property was rented, regardless of whether the property is being sold at a loss or a profit.
The property value reduction must then be taxed as a result of this. Furthermore, even if no deduction from depreciation is collected, your net loss or profit on the arrangement of the US property must be calculated in the same way that it would be if depreciation had been claimed.
Taxes When Renting Out Your House While Living Abroad
If you employ property management firms to monitor and report income and expenses related to your property, the costs can add up quickly. However, this tact has the advantage of providing you with an annual income and expense report that you can use when filing your US expat tax returns.
The use of rental property management software or an online spreadsheet to stay on top of all your US home transactions is an option if you make a decision to manage your US property from abroad. In the United States, you can lessen your expat tax burden if you effectively record and maintain financial details about your residence in the United States.
Staying on Top of US Property Expenses
The depreciation on your rental property, as an American expat living outside the United States, is one of the most significant tax deductions you could have with your US residence. Depreciation is a reduction in the value of an asset over time as a result of general wear and tear.
Consider the case of a house where the paint has begun to peel off the walls and the stairs have become rickety over time. Because of the organic wear and tear on the home, it may appear unattractive to prospective buyers, resulting in a decrease in the sale price of the property.
Consequently, you can begin depreciation from the date your home is placed on the market for rent, and the process will last for 27.5 years in total. The basis, or the amount of money you depreciated, will be less than the adjusted basis or less than the fair market value of your residence. In order to calculate the amount of depreciation that will be taken, you can subtract the property’s initial cost and divide it by 27.5 years, for example.
Additional deductible home expenses can be included in your US tax forms; some examples are as follows:
· home repairs
· homeowner association dues
· travel expenses to repair the property or collect rent
· mortgage interest
Landlord Insurance Whilst Living Abroad
The total amount of rent you received from the United States while living as an American overseas must be disclosed on your annual tax return. This holds true for the following as well:
· The normal monthly rental fees
· What your tenants pay for repair services – such as pest control or window repairs – is referred to as the “repair fee.”
· When a tenant is unable to pay rent on time (defaults on payments)
· The tenant causes damage to the property and, as a result, is unable to receive their security deposit back. You have the right to claim income from their security deposit!
Furthermore, security deposits are not considered taxable income. Additionally, if your tenant trades their services in exchange for rent, you may be able to deduct the fair market value of the rent from your income tax return as a deduction.
According to the IRS, Schedule E (Form 1040) can be used to report the following items:
· income or loss from rental real estate, estates, royalties, trusts, S corporations, partnerships, and residual interests in REMICs – real estate mortgage investment conduits.
There is a limit of three residential properties that can be reported per Schedule. Moreover, the state in which your property is located in the United States may impose income tax on you. As a result, you may be required to file a state tax return. It really depends on the tax regulations for each state, and you can get in touch with Taxes for Expats if you want to be certain.
When you’re living overseas, it can be hard to keep up with the tax laws of your home country. However, there are some solutions that will help simplify this process for you and allow you to live abroad worry-free. TFX is a company that specializes in helping expat taxpayers find ways around their US taxes so they don’t have to pay them twice! If you’ve ever found yourself wishing there was an easier way to take care of all these pesky international financial obligations, now’s your chance.
Guest Post By: Veronica Rhodes from TFX
TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.