More and more people are looking overseas for rental income properties. If you own international property, there are certain tax issues you need to understand.
If you own a rental property in Australia, and you are filing as a US tax resident, the rental income must be reported on your U.S. tax return. The allowable expenses are the same as if the rental property were in the US, however, you must depreciate the property over a 40 year period rather than the shorter time of 27.5 years usually allowed for US property.
Under the tax code, losses from passive activities such as rental properties normally cannot be deducted from income; the rental real estate loss allowance provides an exception to that rule.
The rental real estate loss allowance is a federal tax deduction of up to $25,000 that is available to non-real estate professionals who own at least a 10% interest in a rental property where they “actively participate” in the rental activity.
You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. It is possible to meet this test even if the rental property is managed by a property management company. Property owners with modified adjusted gross incomes of $100,000 or less may deduct up to $25,000 in rental real estate losses per year with active participation. This allowance is phased out for taxpayers whose modified adjusted gross income exceeds $100,000 and eliminated entirely when it exceeds $150,000.
Note: these amounts apply to filing status single and married filing jointly, your allowances are 50% for married filing separately.
If you are lodging as a foreign resident in Australia then you must lodge an Australian tax return and pay tax on your Australian income from the rental property. You will need to know the value of the land separately from the building structure in order to calculate depreciation on the building structure (land cannot be depreciated), and work out your capital gain accurately if you sell the property.
You can take a credit against your US federal income tax for income taxes paid in Australia on your rental income after deducting all expenses. That credit is limited to the amount of US Federal tax you paid on the rental income on your Australian tax return. Any unused foreign tax credit can be carried over to future years. Most US states do not allow any credit for income taxes paid in Australia.
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