How do I report foreign rental income?

Foreign rental income must be reported on your US tax return on Schedule E (Supplemental Income and Loss), just as you would report domestic rental income. The US taxes worldwide income, so rental income from properties in any country is subject to US reporting and potentially US taxation.

You report the gross rental income in US dollars, converted from the foreign currency using the average exchange rate for the period the income was received (or the spot rate on the date received, if you prefer consistency). All ordinary and necessary expenses related to the rental property can be deducted, including: property management fees, maintenance and repairs, insurance, property taxes, mortgage interest, travel to the property for management purposes, and depreciation.

Depreciation of foreign rental property follows US rules: residential rental property is depreciated over 27.5 years using the straight-line method, and commercial property over 39 years. The cost basis for depreciation should be the US dollar equivalent at the time of purchase.

If you also pay income tax on the rental income to the country where the property is located, you can claim a Foreign Tax Credit on Form 1116 for those taxes. This prevents double taxation. Foreign property taxes are generally not creditable (they are deductible as rental expenses), but foreign income taxes on rental income do qualify for the FTC.

The Foreign Earned Income Exclusion does NOT apply to rental income because it is passive/unearned income, not earned income from personal services. This means rental income is always subject to US tax (offset by foreign tax credits and deductions).

If you sell the rental property, you must report the capital gain and recapture any depreciation taken. The gain or loss is calculated in US dollars, which means exchange rate fluctuations between the purchase and sale dates affect your gain calculation. This can create surprising results — you might have a gain in US dollars even if the property decreased in value in local currency.

We help expat property owners properly report their rental income and optimize the tax treatment across both countries.