If you currently own real property in another country outside the U.S. and you receive rental income from that property, you are required to report that income to the Internal Revenue Service (IRS). Indeed, foreign rental income is treated, essentially, as domestic rental income if you are a U.S. citizen or you hold a Green Card and you receive rental income from the foreign property. Accordingly, if you fall into this category, you need to take the time to understand foreign rental income IRS reporting requirements.

Understanding What Rental Income Includes

Whether you own a condominium in Toronto that you rent on a yearly lease basis or a vacation home in Johannesburg, South Africa or Shanghai, China that you rent to guests through Airbnb, VRBO, or a similar service, you will likely need to report that rental income to the IRS if you are a U.S. citizen or a Green Card holder in the U.S. The IRS clarifies that rental income can include various forms of payment, including the following:

  • Money a tenant pays you to cancel his or her lease;
  • Any advance rent you receive from a tenant;
  • Any expenses you receive from a tenant (even if the expenses may be deductible); and
  • Amount of tenant security deposits you retain when the tenant vacates the property, acknowledging that some of that income may be deductible as expenses if it is used to make repairs due to tenant damage.

Changes to Rental Income Tax Rules During COVID-19

If you have not declared foreign rental income, it is possible that you could be eligible for some tax breaks for landlords related to the COVID-19 pandemic. If you have experienced a loss this year due to the pandemic, you are now able to deduct the loss from your taxable income going back to 2015. You may be eligible to apply net operating losses going back five years from the date of the loss. An experienced tax attorney can discuss this possibility with you.

You also may be able to deduct additional loan interest. Due to COVID-19, the amount of loan interest that is deductible for businesses (including rental income businesses for landlords) increased to 50% of taxable income. In addition, you may be able to claim a corporate alternative minimum tax credit immediately.

During COVID, it is also important to be aware that deductions for rental expenses remain in effect. As such, you can work with a tax lawyer to find out about deducting depreciation, repair costs, and operating expenses from your total rental income for the year.

Exceptions to Foreign Rental Income IRS Reporting Requirements 

There is a clear exception to reporting foreign rental income that you should bear in mind. If your foreign property is your primary residence (i.e., if you are an American citizen living abroad) and you use it for personal purposes during the tax year for more than the greater of 14 days or 10 percent of the total days rented to others at a fair rental value, then you do not need to report your foreign rental income. However, even if your foreign property is your primary residence but you have been staying in the U.S. due to COVID-19 travel risks and you have been renting your primary residence out for several weeks or months, then you will be required to report that foreign rental income to the IRS.

Contact a Tax Advisor for Assistance 

If you have questions about reporting foreign rental income to the IRS, you should seek out an IRS tax attorney near you for assistance. Contact Accretive Law today to discuss your situation.