Rental Income for Expats: Taxing US Property While Living Abroad

Owning rental property—whether in the U.S. or abroad—adds complexity to your expat taxes. The income isn't excludable under FEIE, but there are still strategies to minimize your tax burden. Here's what you need to know.

The FEIE Doesn't Help Here

Let's get the bad news out of the way:

⚠️ Key Point: Rental income is NOT excludable under the FEIE. The Foreign Earned Income Exclusion only applies to earned income—wages, salaries, self-employment income from services. Rental income is passive/investment income.

This means all your rental income is potentially taxable, regardless of where you live or where the property is located.

U.S. Rental Property While Living Abroad

If you own rental property in the U.S. while living overseas:

Tax Treatment

• Report income on Schedule E
• Deduct expenses (mortgage interest, taxes, insurance, repairs, depreciation)
• Net income is taxable at ordinary rates
• Net losses may be deductible (passive activity rules apply)

State Tax Implications

• The state where the property is located will tax the income
• You may need to file a non-resident return in that state
• Having U.S. rental property may complicate your state departure

Foreign Rental Property

If you own rental property in your country of residence or another foreign country:

Same U.S. Tax Treatment

• Report worldwide income, including foreign rentals
• Same Schedule E treatment
• Same deductions available

Foreign Tax Credit

If your foreign country taxes the rental income:

• You may claim a Foreign Tax Credit on your U.S. return
• This prevents double taxation
• File Form 1116 to claim the credit

Currency Considerations

• Income and expenses must be converted to USD
• Currency fluctuations can create gains or losses
• Depreciation is calculated in USD

Deductions That Reduce Taxable Income

Deduction	Description
Mortgage Interest	Fully deductible against rental income
Property Taxes	Deductible as rental expense
Insurance	Property and liability insurance
Repairs & Maintenance	Ordinary repairs deducted immediately
Depreciation	Spread purchase price over 27.5 years (residential)
Property Management	Fees paid to manage the property
Travel	Trips to check on or maintain property
HOA Fees	If property is in an association

Depreciation: Your Best Friend

Depreciation is often the biggest tax-saver for rental properties:

How It Works

• Deduct a portion of the building's cost each year
• Residential rental: 27.5-year schedule
• Foreign residential: 40 years (different rule)
• Land is not depreciable—only the building

Example

Property cost: $300,000 (building value $240,000)

• Annual depreciation: $240,000 ÷ 27.5 = $8,727
• This reduces your taxable rental income by $8,727/year
• Often creates a paper loss even when cash flow is positive

Passive Activity Rules

Rental income is generally "passive," which affects how losses are treated:

If You Have a Net Rental Loss

• Generally can only offset other passive income
• Excess losses carry forward
• Exception: Up to $25,000 can offset non-passive income if AGI < $100,000
• Exception phases out between $100K-$150K AGI

Real Estate Professional Exception

If you qualify as a real estate professional:

• Rental activities may be non-passive
• Losses can offset any income
• Requires 750+ hours and material participation
• Difficult to meet while working another full-time job abroad

Selling Rental Property From Abroad

Capital Gains

• Long-term rates (0%, 15%, or 20%) if held over 1 year
• Depreciation recapture taxed at 25%
• State taxes if U.S. property

FIRPTA for Foreign Sellers

When you (a U.S. person living abroad) sell U.S. real estate:

• Buyer may be required to withhold 15% for FIRPTA
• You can apply for reduced withholding with Form 8288-B
• Claim credit on your return for withheld amounts

1031 Exchange

• Defer capital gains by exchanging into another property
• Complex rules about identifying and closing on replacement property
• Works for U.S. properties (foreign-to-U.S. exchanges are problematic)

Reporting Requirements

Schedule E

Report all rental properties on Schedule E of Form 1040:

• Income and expenses for each property
• Depreciation calculations
• Carryforward of suspended losses

FBAR and Form 8938

Rental property itself isn't reported on FBAR/8938, but:

• Foreign bank accounts holding rental proceeds are reportable
• Foreign mortgage might have reporting implications

Common Rental Income Mistakes for Expats

1. Assuming FEIE covers rental income: It doesn't
2. Not depreciating foreign property: Different schedule but still available
3. Ignoring state taxes: Property state will tax you
4. Not claiming Foreign Tax Credit: If foreign country taxes the income
5. Poor expense tracking: Every deduction reduces your tax

📌 Bottom Line

Rental income doesn't get the FEIE benefit, but you can still minimize taxes through depreciation, careful expense tracking, and the Foreign Tax Credit (for foreign properties). Keep meticulous records, understand the passive activity rules, and consider the tax implications before buying or selling rental property while abroad.