If you are a US citizen or resident who owns a rental property in another country, the starting point is simpler than most people expect: foreign rental income goes on Schedule E of your Form 1040 in US dollars, with the same deductions a domestic landlord claims. The complications are not in the structure of the return. They sit in four rules that behave differently than they would for a property down the street, and each costs real money when handled wrong. Depreciation runs on a different clock, every figure has to be translated into dollars, foreign tax follows a narrow path onto Form 1116, and information returns can attach to the arrangement even when the property itself needs no disclosure.
How Do You Report Foreign Rental Income on a US Tax Return?
Foreign rental income goes on Schedule E, Part I, the same schedule used for a domestic rental, with a separate column for each property and the foreign address entered on the property line. US citizens and residents are taxed on worldwide income, so the rent is reportable whether or not it is remitted to the United States and whether or not the foreign country taxes it first.
Every ordinary and necessary expense a domestic landlord deducts is deductible here too: mortgage interest, foreign property taxes, insurance, repairs, utilities, management fees, and travel to the property. Depreciation is computed on Form 4562 and carried to Schedule E.
One point worth settling early: foreign real property tax is deductible against the rental income on Schedule E, but it is not a creditable foreign income tax under IRC Section 901, because a property tax is not an income tax. Only the foreign country's income tax on the rental profit is creditable.
Why Is Foreign Rental Property Depreciated Over 30 Years Instead of 27.5?
Because IRC Section 168(g)(1)(A) forces any tangible property used predominantly outside the United States into the alternative depreciation system, and the ADS recovery period for residential rental property is 30 years, not the 27.5-year period a domestic rental uses. For foreign nonresidential real property, the ADS period is 40 years under IRC Section 168(g)(2)(C).
This is the most commonly misstated rule in the area, so it is worth being precise. Before the 2017 tax law, foreign residential rental property carried a 40-year ADS period. That was shortened to 30 years for property placed in service after December 31, 2017. Much published guidance still says 40 years for foreign residential property. The figure is not wrong, it is out of date: it now applies only to pre-2018 property. If you bought a foreign rental in 2019 and have been running it over 40 years, you have understated your deduction every year since.
Foreign Rental Depreciation at a Glance
Reference- Trigger: IRC Section 168(g)(1)(A), property used predominantly outside the United States.
- Method: ADS straight line. Nothing at the property qualifies for bonus depreciation or Section 179, not the building and not the appliances or furniture inside it, because Section 179(d)(1) excludes property described in Section 50(b)(1) and ADS property is ineligible for bonus.
- Residential rental, placed in service after 12/31/2017: 30 years.
- Residential rental, placed in service before 1/1/2018: 40 years.
- Nonresidential real property: 40 years.
- Convention: mid-month for real property under IRC Section 168(d)(2).
- Land: never depreciable, so the purchase price must be allocated between land and building.
Two consequences follow. ADS is mandatory, not elective, so there is no version of this where a foreign rental gets bonus depreciation, on the building or on the contents. And depreciation is "allowed or allowable," meaning basis is reduced by the depreciation you should have taken even if you never claimed it, with the shortfall resurfacing as recapture when you sell the foreign property. A wrong recovery period is not a wash over time: it costs deductions now and still costs you on the sale.
What Exchange Rate Do You Use for Foreign Rent, Expenses, and Basis?
The IRS has no official exchange rate. It generally accepts any posted rate, provided you use that source consistently across the return and from year to year. The yearly average rate table the IRS publishes is a convenience, not a requirement, and taxpayers are not obligated to use it.
The translation rules differ by item, and this is where returns go wrong:
- Rent and cash expenses are translated at the spot rate on the date each amount is received or paid. Where rent arrives monthly and expenses are paid steadily, a yearly average rate is a reasonable and widely used simplification.
- Basis and depreciation are not retranslated. The dollar basis is fixed at the exchange rate on the acquisition date, and depreciation runs on that historical dollar figure for the entire recovery period. Later currency movements do not change the annual deduction.
- Foreign taxes for credit purposes follow their own rules, generally the rate when the tax is paid for a cash-basis taxpayer.
Pick one published source, document it, and stay with it. Consistency is the actual standard being applied, and a return that translates rent at one source, expenses at another, and taxes at a third is hard to defend even when each individual rate is defensible.
Can the FEIE or the Foreign Tax Credit Offset Foreign Rental Income?
The foreign earned income exclusion cannot touch it. IRC Section 911 excludes foreign earned income, meaning compensation for personal services, and rental income is not compensation for services. The correct relief is the foreign tax credit on Form 1116, and rental income falls in the passive category under IRC Section 904(d)(2)(B). Two exceptions move it out of that basket. Where the rent is derived in the active conduct of a trade or business, Treasury Regulation 1.904-4(b)(2)(iii) puts it in the general category instead. And under the high-tax kickout in IRC Section 904(d)(2)(B)(iii), foreign rental income taxed abroad above the highest US rate is recharacterized as general category income, which matters in high-rate jurisdictions. Getting the basket right, and coordinating it with the return you file in the property's country, is cross-border tax work.
Because the passive category is computed separately from the general category, foreign tax paid on your salary abroad cannot subsidize US tax on your rental profit, and vice versa. That separation catches people who assume a large general-category carryover will absorb the rental. It will not. If the property sits in a treaty country, the treaty's immovable property article generally preserves the source country's primary right to tax the rent, and any treaty position that changes your US result may require disclosure, covered in our guide to treaty benefits and Form 8833. Timing is the other trap: where the foreign country runs a different fiscal year or assesses the tax long after the rent was earned, the credit can land in a year with no matching income and become an unusable carryover.
Does a Foreign Rental Property Have to Be Reported on Form 8938 or the FBAR?
Foreign real estate held directly in your own name is generally not a specified foreign financial asset and does not go on Form 8938. That surprises people, but it is the rule. The exceptions swallow a lot of real situations.
What Actually Triggers Reporting
Caution- Directly held house or apartment abroad: generally not reportable on Form 8938.
- Property held through a foreign corporation, partnership, or trust: your interest in that entity is a specified foreign financial asset, and the entity itself may trigger its own return.
- Foreign bank account that receives the rent: reportable on the FBAR once all foreign accounts aggregate over $10,000 at any point in the year, and on Form 8938 once its thresholds are met.
- Foreign mortgage denominated in foreign currency: creates Section 988 exposure on payoff or refinance.
The last item ambushes owners. A mortgage denominated in a currency other than the dollar is a Section 988 transaction, and paying it off or refinancing produces ordinary exchange gain or loss on the change in the debt's dollar value between the borrowing and payoff dates, separate from any gain on the property. If the foreign currency weakened over the life of the loan, you repaid a cheaper debt in dollar terms and you have taxable gain, even though nothing about it felt like income. The $200 personal-transaction de minimis under IRC Section 988(e)(2) does not help: it reaches gain on disposing of nonfunctional currency, not debt instruments. The mechanics are in our guide to Section 988 foreign currency gains.
How Do Passive Activity Loss Rules Limit a Foreign Rental Loss?
A foreign rental is a passive activity under IRC Section 469 just like a domestic one, so a net loss generally cannot offset wages or portfolio income. It is suspended and carried forward until you have passive income to absorb it or you dispose of the property in a fully taxable transaction.
The main relief is the special $25,000 allowance for rental real estate. Per IRS Publication 925, an individual who actively participates may deduct up to $25,000 of rental loss against nonpassive income. Active participation is a lower bar than material participation: it requires making management decisions in a significant and bona fide sense while holding at least 10 percent by value of the activity. The allowance phases out by 50 cents for every dollar of modified adjusted gross income over $100,000 and is fully eliminated at $150,000 of MAGI. A married taxpayer filing separately who lived apart from their spouse for the entire year is capped at $12,500, against a proportionately lower phaseout range.
Nothing in Section 469 restricts the allowance to US property, so it is available for a foreign rental. Two things commonly disqualify owners anyway: an MAGI above $150,000, common among people who own property in two countries, and the difficulty of showing active participation for a property run by a foreign agent you rarely instruct. The 30-year ADS period also makes a foreign rental less likely to throw off a paper loss at all, since it yields a smaller annual deduction than 27.5-year MACRS. The one relief that survives a high MAGI is real estate professional status under IRC Section 469(c)(7), which makes a materially participated rental nonpassive outright. Nothing restricts it to US property either, but the hour thresholds are demanding for a property managed from another country.
What Happens If You Stay in the Property Yourself?
If your personal use of the property exceeds the greater of 14 days or 10 percent of the days it was rented at a fair rental price, IRC Section 280A treats it as a residence, and your deductions are limited to the gross rental income remaining after the allocable share of expenses you could deduct anyway, such as mortgage interest and property taxes. You cannot generate a deductible loss from a property that is partly your vacation home.
Two details matter abroad, because owners frequently use the place themselves. Days spent primarily to perform repairs or maintenance do not count as personal use, but the substantiation has to be genuine. And days rented below a fair rental price count as personal use days, as do days a family member uses the place, with one important exception: IRC Section 280A(d)(3) removes from personal use any period the unit is rented at a fair rental to someone, family included, who uses it as their principal residence. Fair rent plus principal residence is the test that saves the arrangement. Expenses in a mixed-use year are allocated between rental and personal days, with the disallowed rental portion carried forward.
A separate rule sits at the other extreme: under IRC Section 280A(g), if you use the property yourself as a residence during the year and it is actually rented for fewer than 15 days, the rental income is not reported at all and no rental deductions are claimed. Both conditions are required. A property you never occupy does not qualify, so a slow year with only a few weeks of tenants is still fully reportable on Schedule E.
Bottom Line
A foreign rental is not a different kind of return, it is a Schedule E with four rules pointed in a different direction. The 30-year ADS period for post-2017 foreign residential property is the one most often gotten wrong, and a long-running depreciation error is usually corrected through a change in accounting method rather than amended returns, so it is fixable without reopening years. The rest is less about arithmetic than consistency: one rate source, the passive basket on Form 1116, and a clear map of which account, entity, or loan actually triggers a filing.
Our international tax team prepares foreign rental returns end to end, including the depreciation reconstruction and the related foreign information returns. Have questions about foreign rental income and US tax? Contact TS CPA for a free consultation. We respond within the same day.
Official IRS and Government Sources
- IRS Publication 527, Residential Rental Property
- IRS Publication 925, Passive Activity and At-Risk Rules
- IRC Section 168(g), Alternative Depreciation System
- IRC Section 280A, Business Use of a Home and Rental of Vacation Homes
- IRC Section 469, Passive Activity Losses and Credits Limited
- IRC Section 988, Treatment of Certain Foreign Currency Transactions
- IRS Foreign Currency and Currency Exchange Rates