Foreign Rental Income Tax: Reporting Rules & Deductions
Owning a rental property abroad can be a lucrative investment, but it comes with US tax obligations that can’t be ignored. As a US citizen or Green Card holder, you’re required to report all foreign rental income to the IRS, whether it’s from a beach villa in Spain or an apartment in Tokyo. Fortunately, deductions, depreciation, and credits like the Foreign Tax Credit can ease the burden.
In this guide, we’ll cover the essentials: what’s taxable, how to report it, additional filing requirements, depreciation rules, and how to avoid double taxation. Let’s simplify your 2025 tax responsibilities and keep you compliant.
Key Takeaways
- Rental property owned by a US citizen or resident outside of the US is subject to US taxation.
- Foreign rental property and US rental property are mostly governed by the same rules, with a few differences.
- The IRS provides certain tax benefits that expat property owners can use to reduce their US tax bill.
Do US Citizens Pay Taxes on Foreign Rental Income?
Yes, all US citizens and Green Card holders must report their worldwide income to the IRS, including rental income from foreign properties. This rule applies regardless of where you live or where the property is located.
Taxable rental income includes:
- Monthly rental payments from long-term tenants
- Short-term vacation rental income (e.g., Airbnb earnings)
- Rental income received in foreign currency, which must be converted to USD using the IRS annual average exchange rate
The IRS treats foreign rental income as passive income, taxed at your standard federal rate, and deductions can apply. For example, let’s say your rental income is $24,000 per year. You have $6,000 of deductible expenses (e.g., repairs, insurance). This means your taxable income would increase by $18,000 of taxable rental income.
Unlike earned wages, rental income is not eligible for the Foreign Earned Income Exclusion (FEIE). However, the Foreign Tax Credit can be used to lower your tax bill. (More on that below!)
Vacation Home Rates & Rules
If your foreign property doubles as a vacation or second home, reporting depends on usage and rental days as shown below:
| Owner’s Use | Time Rented Out | Tax Treatment |
| None | 0-365 Days | Regular rental property |
| 15+ Days | <15 Days | Not reportable on tax return |
| <15 Days or 10% of days rented | 15+ Days | Vacation home AND rental property |
| >14 Days or 10% of days rented | 15+ Days | Vacation home AND secondary residence |
For instance, if you use your property 20 days and rent it 10 days, it’s not reportable. But if you rent it 20 days and use it 5 days, it’s treated as both a vacation home and a rental property, requiring income reporting with limited deductions. The IRS rules for a property that is treated as partially a vacation home are designed to reduce the total expenses that can be deducted.
How to Report Foreign Rental Income
Reporting foreign rental income is straightforward with the right forms. All rental income must be reported on Schedule E (Form 1040), just like US rental properties. File this with your annual tax return by April 15, 2025 (with an automatic extension to June 15 for expats, and an optional further extension to October 15 if needed).
You can offset your income with common deductions, including:
- Property taxes paid to the foreign government
- Mortgage interest on the rental property loan
- Repairs and maintenance costs (e.g., fixing a leaky roof)
- Property management fees
- Insurance premiums for the property
Since the 2017 Tax Cuts and Jobs Act, foreign property taxes for personal use property are no longer deductible on Schedule A, but they remain deductible on Schedule E for rental properties.
All income and expenses must be converted to US dollars. Using the IRS annual average exchange rate (available at irs.gov) is appropriate for many situations. For example, if you earned €20,000 in rent and spent €5,000 on repairs, convert both amounts to USD based on the 2024 rate (filed in 2025). This would mean $21,600 and $5,400, respectively, yielding $16,200 taxable income.
Other US Reporting Requirements
Beyond Schedule E, foreign rental properties may trigger additional US reporting requirements in 2025:
Foreign Bank Account Report (FBAR)
If you deposit rental income into a foreign bank account and the total value of all your foreign accounts exceeds $10,000 at any point during the year, you must file an FBAR to report it. The deadline to have this filed is April 15 (auto-extended to October 15). Penalties for noncompliance start at $12,500 per year.
Foreign Account Tax Compliance Act (FATCA)
If your total foreign financial assets (including bank accounts, investments, or the rental property itself if held in certain entities) exceed certain thresholds, you will have to file a FATCA report. For expats, those thresholds are:
- For single filers living abroad, $200,000 on the last day of the year or $300,000 at any time during the year. This threshold also applies to all other filing statuses except Married Filing Jointly.
- For married filing jointly living abroad, $400,000 on the last day of the year or $600,000 at any time during the year.
FATCA reports are included on Form 8938 as part of your tax return.
Ownership via Foreign LLC or Corporation
Suppose your rental property is held through a foreign entity, like an LLC, trust, or corporation. In that case, additional forms apply. Form 5471 (for foreign corporations) or Form 8858 (for foreign disregarded entities) may be required, each carrying a $10,000 penalty for non-filing. These are complex and should be prepared by a professional only. If Form 5471 is not prepared to the IRS’s satisfaction, they can impose a $10,000 penalty on whoever prepared it. Other penalties for this form and similar forms can apply, so we only suggest that an experienced professional prepare them.
Missing any of these filings can lead to audits or fines, so review your setup carefully.
Dreading the last minute scramble pulling together your tax documents? Despair no more! This simple checklist lists the documents you need to have on hand when preparing to file.
Foreign Property Depreciation Rules
Depreciation is the annual “wear and tear” on a property that can be claimed as an expense. Depreciation lets you spread the cost of your rental property over time, reducing your tax. For US properties, the IRS uses a 27.5-year schedule for residential rentals. Foreign properties, however, fall under the Alternative Depreciation System (ADS), requiring a 30-year schedule as of 2025.
For example, suppose your foreign rental property’s building value (excluding land) is $390,000. You calculate depreciation by dividing $390,000 by 30, which equals approximately $13,000 annually. You deduct this $13,000 annually from your rental income, lowering your tax bill.
Note that this 30-year deprecation period applies only to residential rental properties. Properties classified in other ways, such as commercial rental property or business equipment rental property, are depreciated over a different number of years.
When you sell, depreciation recapture kicks in. If you realize a gain, the total depreciation claimed (e.g., $50,000 over 5 years) may be taxed at a flat 25% rate, separate from capital gains. For a $100,000 gain, you may pay $12,500 on recaptured depreciation plus capital gains tax at a rate of 0%, 15%, or 20% on the remaining $50,000.
Can You Use the Foreign Tax Credit for Foreign Rental Income?
Yes, the Foreign Tax Credit (FTC) can prevent double taxation on foreign rental income already taxed abroad. To qualify, the foreign tax must:
- Be an income tax (not a property or sales tax)
- Be legally owed and paid by a foreign government
Here’s an example:
- Foreign Rental Income: $30,000
- Foreign Income Tax Paid: $4,500
- US Tax Owed (22% bracket): $6,600
- With FTC: $6,600 – $4,500 = $2,100 US tax due
The credit is limited to the US tax on that income, so excess foreign taxes can’t offset other US liabilities. However, unused credits can be used for up to 10 years in the future to offset tax on rental income. This makes the FTC a powerful tool for expats, especially in high-tax countries.
Get Expert Help with Your Foreign Rental Income Taxes
Now you should have a better understanding of the tax implications for your foreign rental property! If you have more questions, we have the answers. In fact, we can even prepare and file your expat tax return on your behalf.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
