Many Americans who live overseas choose to rent out their homes in the United States. It can be a good source of income and allows you to keep your US home if you ever decide to return. However, you must keep meticulous records of your income and expenses since any income (or loss) must be reported on your US expat tax return. We'll look at the additional form you'll need to fill out and what expenses you might be allowed to deduct (or not!). Promotions
E (Schedule)
Schedule E, Supplemental Income and Loss, is used to report all rental income and expenses. You'll be pleasantly surprised to receive a neat, tidy summary of all your income and associated expenses at the end of the tax year if you engaged a management business to take care of your rental property operations. Unfortunately, management agencies may be costly, therefore many expats choose to handle their properties themselves. It is your responsibility to keep precise, complete records of everything related to the property in this matter. You might want to think about using rental property management software like Quicken Rental Property Manager to help you stay organized. However, a simple Excel spreadsheet can be used to keep track of everything.
Schedule E allows you to list up to three rental properties. You'll enter your rental revenue and expenses, as well as your calculated depreciation expense, which is sometimes forgotten. You begin depreciating your home over a 27 12 year period the day you start renting it. The lesser of the property's fair market value or the adjusted basis determines how much you depreciate (or 'basis') (which is typically calculated as your purchase price, adjusted for any improvements you made).
Expenses That Are Tax Deductible
There are a number of charges that can be deducted to reduce your US tax liability on the rental property.
Start-up Costs
There are frequently related start-up charges when setting up your rental for business. Fortunately, you can deduct up to $5000 in similar expenses in your first year of renting, according to the IRS. If your startup expenditures surpass $5000, you can capitalize and deduct the remaining costs over the next 15 years. Expenses related to startup costs include:
Premiums for insurance
Prior to renting, there will be maintenance expenses.
Repairs that are minor (to get the property ready to rent, not improvements that increase the value of the property)
Permits, licenses, and registrations
Professional fees (such as legal fees) incurred in forming a business entity are deductible.
Repairs
You can deduct any repairs you make to bring the property back to its original condition on your expat tax return. Repairs are distinct from upgrades, which are'repairs' that boost the property's worth and extend its life. So, if you repaired a leaky roof on your property, you have merely restored the roof to its original state, which is a deductible repair. However, if you need to replace the entire roof, this is a capital improvement (since it extends the property's life) that must be capitalized and depreciated over 27 12 years and is not deductible against rental income.
Fees for Management
You can deduct any fees paid to a business that manages your property on your expat tax return if you hired them to do so.
Interest
The interest paid on a mortgage used to buy or upgrade a rental property can be deducted. This is without a doubt one of the finest tax advantages of buying a home in the United States. Note that if your property is held jointly, only the investor who is legally responsible for the payment can deduct the interest.
Office of the President
You can deduct a percentage of your home costs if you utilize a home office entirely to manage the day-to-day operations of your rental property, based on the square footage of the office and your home. You can deduct the following home office expenses:
Interest on your rent or mortgage
Utilities
Taxes \Insurance \Internet
Travel
Some of the expenses you incurred when returning to the United States to purchase your rental property are deductible. The following costs would be capitalized with the purchase price of the property and depreciated over a period of 27 12 years:
Airfare \Meals \Lodging
The only travel expenses that can be deducted in full are those that are directly related to property management. You can only deduct costs expended on those 4 days if you fly to the United States and spend 4 days working on the property and 3 days visiting with family (i.e. 57 percent of your total travel costs).
There are a few expenses that you may believe are deductible, but they aren't. Any time spent working on the property for personal gain is deemed 'personal labor,' and is not deductible. Contributions to charity, country club dues, and federal income taxes are likewise prohibited. The expenses covered in this post are by no means exhaustive of all the costs you'll face as a property owner. If you have any questions about your expenses, you should see a tax professional who can help you discover all of the various deductions that could lower your taxable income while also ensuring you aren't taking any that the IRS prohibits.