Home Sweet Home: Tax Tips for U.S. Expats Buying Property Overseas
This article is for general information purposes only and is not intended as specific tax advice. Please consult your tax advisor for advice relevant to your situation.
For an expatriate, buying a home overseas can be much more than strictly a financial decision. Often, those of us living away from our country of origin are looking to recapture a sense of stability and permanence or to forge a connection with the community. Sometimes, we're also hoping to participate in what appears to be a rapidly appreciating property market.
In many cases, owning a home overseas can be a good decision. But it is also one of the biggest financial decisions an expat will face, and it shouldn’t be made lightly. This is particularly important for American expats, who are taxed not only by their country of residence, but also by the United States on all their global assets and income. Here are some of the basic facts you need to know before buying a home overseas.
Changes to Expat Homeowner Itemized Tax Deductions in 2018
While U.S. expat taxpayers who own a primary residence overseas are entitled to some U.S. tax deductions, the Tax Reform Act of 2017 has made changes. Since the standard deduction was increased in tax year 2018 to $12,000 for individual filers, $18,000 for heads of household, and $24,000 for married couples, there may be less reason to itemize deductions overall. Also, while expats can still deduct mortgage interest within lower limits, other items such as personal foreign real property tax can no longer be deducted.
You also must have income against which to make itemized deductions. For example, if all of your income is already excluded by the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion, you may have no income against which to take the deduction.
Selling Your Home Overseas
When you sell your primary home overseas, you are still eligible for the same exclusion on capital gains as you are when you sell your home in the U.S., subject to the following rules:
- As a U.S. citizen owner, you are entitled to exclude the first $250,000 in gains, provided you used the property as a principal residence in two of the five years preceding the sale and have not excluded another home from capital gains in the two-year period before the home sale.
- If both you and your spouse are U.S. citizens or green card holders, or file taxes as married filing jointly (MFJ), you are both entitled to the exemption and can exclude up to $500,000 in capital gains.
- If your spouse is a co-owner but is not a U.S. citizen or green card holder and you are not filing U.S. taxes as MFJ, your spouse's portion of the capital gain on the house is not subject to U.S. tax. Your exclusion is limited to $250,000.
U.S. expats should note that any exclusion under U.S. tax law doesn’t absolve you from tax obligations in your country of residence. You could still end up paying tax on the gains in your country of residence while excluding all the gains from U.S. tax. You may also end up in a situation where you are paying taxes on the sale in both your country of residence and the U.S. In this case, you may be able to claim a foreign tax credit and apply it against your U.S. taxes.
Ownership Through a Corporate Structure
So far, we have been talking about owning property as an individual. In some cases, people choose to own their home in a foreign country through a corporate structure. This could make sense for some, depending on their situation.
A common practice in countries such as Thailand is to own the property through a corporate structure. If a corporate structure owns the property, the corporate tax laws for calculating gains and distributing profits are entirely different from personal tax laws for both your country of residence and the United States. This may result in higher or lower total tax than owning as an individual, depending on your set of circumstances.
As an American, ownership in a foreign company requires you to file additional tax disclosure forms. For example, if you own at least 10% of the shares or control 10% or more of the voting rights, you may need to file Form 5471: Information Return of U.S. Person with Respect to Certain Foreign Corporations.
Additionally, if the corporate structure is set up solely to hold the property, it may be classified as a passive foreign investment corporation (PFIC), subjecting you to some particularly harsh tax rules. Anyone considering owning property through a corporate structure should obtain advice from a qualified tax professional familiar with both the laws of the U.S. and your country of residence.
It Pays to Do Your Homework
Buying a home is often more than just a financial decision. This is especially the case in a foreign country, where there is a desire to establish a connection to the community, gain some stability, or participate in a booming real estate market. Whatever the reason, buying property overseas can entail more risk than buying a property in your home country. It pays to spend some extra time to carefully think through the details and potential scenarios before committing.
This article is intended to highlight some key tax considerations facing expat Americans when purchasing a primary residence overseas. It should not be taken for tax or legal advice. The rules and regulations and how they intersect with the U.S. tax code vary from country to country. Please consult your tax or financial advisor for your specific situation.
This article is a revised and updated version of one that had appeared previously on www.crevelingandcreveling.com.
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About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.
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