Buying a home is a lifelong dream for many and purchasing a property abroad comes with many conditions. US Citizens do buy properties abroad for settling there, for investment purposes or simply as a holiday home, or after a retirement plan.
While buying a property abroad, many points need to be considered like tax implications, exchange rates, legal structures, and so on. Do research about the local laws related to buying and selling of a property, and take some tax advise for US expats
Also, open a bank account in the host country. This way, it will be easier to manage the taxes, and property mortgage.
As per IRS, you are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes according to the Internal Revenue Code. So if you are someone Buying property abroad as an American (US Expat) read further to know its impact in every aspect.
Tax Implications of Buying Property Abroad
Purchasing a home in a foreign land does not come under a reportable transaction. However, when you sell a property, then the profit or loss made under such transaction is to be reported under Schedule D of the taxpayer’s US expat taxes.
However, while buying property abroad as an American (US Expat), if a person transfers or take a loan of an amount which is more than $10,000 then it will come under Foreign Bank and Financial Accounts Report (FBAR) and possibly Foreign Account Tax Compliance Act (FATCA) filing requirements.
Foreign Bank and Financial Accounts
It is also called FinCEN Form 114. As per Finacial Crimes Enforcement Network, ‘A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.’
Foreign Account Tax Compliance Act (FATCA)
This act is used to combat tax evasion by American citizens maintaining financial accounts and other financial assets abroad. Under this act, U.S. taxpayers owning financial assets outside the US must report those assets to the IRS on Form 8938.
Host Country Requirements
Each country has a different real estate legal structure. It is advised to get in touch with the US embassy of the host country and understand the legalities beforehand. Check the mortgage requirements, downpayment, etc. It is important to understand about property tax, registration charges, and other charges levied by the government or brokers.
Effects of the Exchange Rate on Foreign Property Sales
The rules for selling property abroad are the same as that within the country. While selling a property abroad, one may experience profits or loss. This profit or loss is personal earnings.
Any losses while selling the foreign property are not deductible, however, in the case of profit, regular income rates are applicable.
Foreign exchange rates are effective on these gains or losses when the mortgage is paid. Hence it is important to keep a check on the applicable exchange rates.
Selling Property Abroad: How Your US Expat Taxes Are Affected
If a person has lived in that property for a year or more, then he/she is eligible for capital gain tax rates at the lower, long-term level.
As per IRS on capital gain tax, a person could qualify to exclude up to $250,000 of the capital gain from the income, if applied individually. If the tax is filled as a joint return with a spouse, one could exclude up to $500,000.
In order to be eligible for capital gain tax, one needs to pass both the ownership and use tests.
Buying or selling a property abroad as a US citizen comes with certain prerequisites. Research as much as possible before investing in any property. Understand all the requirements and how this property can be worthwhile from a taxation point of view. Get in touch with American expatriate tax consultants
to know in-depth about buying a property abroad.