Ines Zemelman, EA 15-Apr-12
Moving abroad is a difficult and complicated process even apart from the issue of real estate. Purchasing real estate overseas has complicated implications on your expat taxes. Because US citizens’ worldwide transactions must be reported on expat tax forms, this article will attempt to cover those transactions involved in foreign property sale and their impact on expat taxes.
Buying Foreign Real Estate
The purchase of either foreign or domestic property does not usually need to be reported on an expat’s taxes unless a Homebuyer’s Credit is in effect for the relevant year. However, when an expat sells his primary residence, he is required to report the gain or loss on Schedule D of his expat taxes. Because most properties bought will eventually be sold, it is essential that all costs associated with the original purchase be documented.
Foreign real estate transactions are not completed in the same way as US transactions. Before any property is purchased, it is important that the applicable laws of your host country are fully researched. It will also be important to open a bank account in the country in which the property is located. This will greatly assist in the management of your foreign property/home mortgage and related taxes.
However, opening a foreign bank account may require you to file Form TD F 90-22.1 (Foreign Bank Accounts Report - FBAR). To learn more about the filing requirements for FBAR forms, please see our page on FBAR.
Be especially sure, when transferring money from a US to a foreign account, or vice versa, that you are aware of the current exchange rates and fees. Do this research initially, because paying the down payment on your new home will require a substantially sized transfer. Research, in addition to hiring a qualified broker who can assure you are getting the best exchange rates, can save you upward from thousands of dollars.
Because it’s always better to be safe than sorry, expats should also check with the US embassy for help with local property taxes and laws. Depending on the host country, many Americans are in for a big surprise when facing the high governmental and real estate fees of many foreign countries. Research, research, research before buying to ensure the process goes as smoothly as possible.
Fees and taxes related to your foreign mortgage are deductible on your expat taxes, regardless of your home’s foreign location. The information does need to be reported in Dollars (US), though, making it essential to covert the US Dollar/foreign currency amount before claiming the amount on your tax forms. The IRS website lists the current conversion rates for many countries, and is a good place to start when planning your filing strategy.
Selling Foreign Real Estate
In regard to your expat taxes, the sale of your foreign home will have a much greater impact than the purchase of said property. US citizens must report the gain or loss that results from the sale on their expat tax forms. Additionally, if the home in question has been your primary residence for two of the past five years, at least, then you are allowed to exclude an amount up to $250,000 (or up to $500,000 for married couples) on which you will not pay taxes. If you have not lived in the home for this required amount of time, the entire gained amount will be subject to capital gains tax. Whether or not the gain is fully excluded, however, the is foreign sourced income will be reduced by the foreign tax credit. Unfortunately, it is not counted as earned income and does not fall under the FEIE.
The gain or loss (after the currency exchange) that results from paying off a foreign mortgage qualifies as a personal gain. Resulting losses are not deductible, and resulting gains are taxable at the standard income rate. Any losses incurred during the sale of a home cannot be offset by a currency exchange gain.
Tax Example: Susie Expat
To further explain these principles, we will use Susie Expat as an example. Susie moved to Singapore in late 2003 and began her hunt for her dream home. She chose a home in January of 2004 and signed the papers in February. She paid $250,000,000 Singapore Dollars (SGD). Three years of homesickness later, though, she decided to sell her Singapore home and move back to the US. In July of 2008, after many home improvements, she was able to sell her Singapore home for twice what she paid in 2004. Before tax reporting, each amount must be converted to US dollars and according to the rate on the date of the transaction. Susie is eligible to exclude the entire amount because the was in her home for at least two of the past five years. And because the amount she gained falls below the exclusion ceiling, Susie’s home sale has no affect on her taxes.
As with everything related to your life as an expat, please contact your US embassy and an international tax expert. Upfront research and the initial expense of hiring an expert will save you thousands of dollars in the long run.