FAQs About Property Owned Abroad
Most international professionals own property in more than one country. In this video, we discuss some of the key benefits and challenges to owning international rental properties, as well as provide an introduction to the way they are taxed.
Key topics to be addressed:
• International rental properties as a long term investment
• Top challenges with managing rentals in another country
• Taxation of foreign rental property by the IRS
• What to do about property abroad that is not being reported to the IRS
Hello! Welcome to Worldview’s Cross-Border Wealth Series. In this video we’re going to discuss common questions about property owned abroad. Now we’re big believers in real estate. We think it’s a fantastic investment over the long term and most of our clients, who tend to be cross-border families. international people living here in the US, own at least one property internationally. Some of the challenges of owning a property abroad, obviously the management burden; dealing with tenants and vacancies or managing repairs and such can be a challenge. Another challenge is managing cash flow. Whether its cash flow positive and money is building up that you’d want to bring over here, or whether its cash flow negative and you have to contribute more funds to it. How to make that happen in the easy way, that’s always a challenge.
Now most international people, our clients, have a strong preference for real estate. However, most already own some, as I said. So one dilemma they have is as cash builds up in savings, just from their work and what have you, they often don’t have the time or energy to buy and manage more property. I’ll give you an example we have an Indian client who bought his first flat in will Mumbai way back when he lived there. He since went on to live in Europe and later to the in the Bay Area, in San Francisco, buying several more properties in India along the way. Now he’s at a point where he’s got three properties, they’re all with tenants, he has his family there help manage them but it’s just a lot of work for him. We hear that a lot for people.
So let’s talk taxes for a moment. When you move to the US and you leave a property behind there’s always a decision of whether you should sell that property or rent it out. Most people rent it out, we find. Now there is an issue when there’s a large gain on that property, it’s worth more than you originally paid. When you first move to the US and you begin to rent that property out, if you rent it for more than three years, in the eyes of the IRS it converts to a rental. If you were to sell it after three years it would actually create a very large taxable gain here in the US. So the worst thing to do would be to rent a property for three and a half years with a big gain and then decide to sell it. You need to make that decision earlier on.
Another issue around taxes is how the IRS taxes property that you own abroad, and really how they tax all rental properties whether it’s in the US or abroad. Rental real estate can be a very good tax shelter here in the US. A lot of that has to do with the way the IRS calculates income from a rental property because we use depreciation here. So you basically have the revenue, the income from the property, minus all the expenses and then you also are able to deduct depreciation which is essentially I’ll a small fraction of the assumed value of the structure on the property every year. Because of that it makes rental properties in general, and real estate in general, a good investment for high-income people.
Now, many clients we have don’t always report the properties that they own internationally, right. There really may not be a good reason for this, a lot of times it’s just because when people first moved here they didn’t know or may be there unsure what the ramifications would be. But really, very often it won’t amount to any additional tax. Often there’s higher taxes are already being paid in whatever country that property in, and even if not the IRS method of calculating income as we said with depreciation often tends to yield a somewhat low-level of tax. A lot of times there is not a good reason to not report.
Now in the long run, especially if you plan to be in the US for quite a long time, you really do need to fully. There’s been a lot of talk about information sharing about financial accounts around the world, the FATCA (Foreign Account Tax Compliance Act) issue, and we fully expect that that will flow its way through to property records around the world where governments will share that information.
Another option of course is not only residential rentals but commercial real estate and we will talk about that in one of our upcoming videos. Thank you very much.