Yes, you can depreciate a foreign rental property on your U.S. tax return, but the rules are stricter than they are for a domestic rental. The IRS requires you to use the Alternative Depreciation System (ADS), which means straight-line depreciation over 30 years for residential rentals placed in service after 2017, or 40 years for older residential buildings and any commercial property. There is no election, no accelerated method, and no bonus depreciation available.
Who Can Claim the Deduction
U.S. citizens and resident aliens owe tax on their worldwide income, and rent from a property abroad counts.1Internal Revenue Service. Reporting Foreign Income and Filing a Tax Return When Living Abroad Because that rent is taxable, you’re entitled to deduct the ordinary costs of producing it, including depreciation on the building.
The property has to be held to produce income. A long-term lease, a short-term vacation rental, or an apartment you list on a booking platform all qualify, as long as you’re genuinely renting it out. The structure must have a useful life longer than one year and be subject to wear and tear. Land is never depreciable, so before you calculate anything you need a defensible split between land value and building value.
Watch the Personal-Use Days
If you also stay at the property yourself, the day count matters. Once your personal use exceeds the greater of 14 days or 10% of the days the property is rented at fair market price, the IRS reclassifies the dwelling as a personal residence.2Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property Your rental deductions, depreciation included, are then capped at gross rental income for the year. In a slow rental year that cap can swallow the depreciation benefit entirely.
Why ADS Is Mandatory for Foreign Property
Domestic residential rentals depreciate over 27.5 years, and domestic commercial buildings over 39, under the General Depreciation System. Foreign property is excluded. Under 26 U.S.C. ยง 168(g), any tangible property used predominantly outside the United States must be depreciated under the Alternative Depreciation System.3Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System The moment the building sits on foreign soil, ADS is required.
ADS means straight-line depreciation. Each year’s deduction is the same dollar figure (assuming no improvements), calculated by dividing the depreciable basis by the recovery period.3Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System No declining-balance acceleration. No bonus depreciation.
Using the wrong system or recovery period isn’t a harmless mistake. If it results in understating your tax, the IRS can assess a 20% accuracy-related penalty on the underpaid amount.4Internal Revenue Service. Accuracy-Related Penalty
Recovery Periods for Foreign Real Estate
How long you spread the deduction over depends on what you own and when you started renting it.
- Residential rental placed in service after December 31, 2017: 30 years. The shorter ADS period came in with the Tax Cuts and Jobs Act.5Internal Revenue Service. Publication 527 (2025), Residential Rental Property
- Residential rental placed in service before January 1, 2018: 40 years, unless a narrow exception involving electing real property trade or business status applies.5Internal Revenue Service. Publication 527 (2025), Residential Rental Property
- Nonresidential real property, any placed-in-service date: 40 years. This is the period for offices, retail spaces, warehouses, and similar commercial buildings abroad.6Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
- Qualified improvement property: 20 years under ADS. Interior improvements to nonresidential buildings, such as renovating a leased retail space, sit here.
A building counts as residential rental when at least 80% of its gross rental income comes from dwelling units.5Internal Revenue Service. Publication 527 (2025), Residential Rental Property If it doesn’t clear that threshold, it depreciates over 40 years as nonresidential.
The Mid-Month Convention
You won’t get a full year’s deduction in year one. ADS real property uses the mid-month convention, treating the building as placed in service on the 15th of the month it was actually put to work.5Internal Revenue Service. Publication 527 (2025), Residential Rental Property Start renting on March 5, and the IRS gives you 9.5 months of depreciation for the year. The same convention runs in reverse in the year you sell or stop renting.
Working Out the Numbers
Three inputs drive the annual deduction: the depreciable basis, the placed-in-service date, and the recovery period.
Your depreciable basis is the purchase price plus closing costs and legal fees, minus the value of the land. A professional appraisal or a local tax assessment from the foreign jurisdiction can support the land-to-building allocation. Keep the paperwork; without it, the IRS can push a larger share of your cost onto non-depreciable land.
The placed-in-service date is the day the property was first available for rent, not the day you closed on the purchase. That date pins down which recovery period applies and starts the clock.
Converting Foreign Currency
Your return is in U.S. dollars, so every foreign amount needs translating. The IRS rule is to translate each item of income or expense at the exchange rate prevailing when you receive, pay, or accrue it.7Internal Revenue Service. Foreign Currency and Currency Exchange Rates For the building itself, use the rate on the closing date; for monthly rent, use the rate when each payment was received.
The U.S. Treasury publishes quarterly rates through its Treasury Reporting Rates of Exchange dataset, covering most world currencies.8U.S. Treasury Fiscal Data. Treasury Reporting Rates of Exchange The IRS also publishes yearly average rates for common currencies. Either source is acceptable, but pick a method and stay with it year to year. Switching between spot rates and annual averages to chase a better result invites scrutiny.
Where It Goes on the Return
Depreciation is calculated on Form 4562 (Depreciation and Amortization), and the total flows to Schedule E of your Form 1040. Foreign ADS real property is reported on lines 20a through 20e of Part III of Form 4562.9Internal Revenue Service. 2025 Instructions for Form 4562 The net rental profit or loss from Schedule E then feeds into the rest of your 1040.
How Depreciation Interacts With the Foreign Tax Credit
If the country where the property sits taxes the rental income, you can usually claim a Foreign Tax Credit on Form 1116 to avoid double taxation. Depreciation complicates that credit in a way many owners don’t see coming. The credit is capped by a formula that compares your foreign-source taxable income to your worldwide taxable income.10Office of the Law Revision Counsel. 26 USC 904 – Limitation on Credit
Depreciation reduces your foreign-source taxable income, which shrinks the ceiling on the credit you can use this year. If your foreign rental grosses $20,000 and depreciation plus other expenses cut foreign-source taxable income to $5,000, the credit limitation runs off that $5,000. The foreign country, meanwhile, may have taxed a much larger figure because it uses different depreciation rules. The result is excess foreign tax credits that carry forward but may never be fully used. It’s worth modeling the numbers before assuming the credit will neutralize the foreign tax bill.
What Happens at Sale: Depreciation Recapture
Depreciation doesn’t vanish when you sell. Every dollar you deducted gets recaptured as taxable gain, even if the property lost value in the market. For real property depreciated on the straight-line method, this appears as “unrecaptured Section 1250 gain,” taxed at a maximum federal rate of 25%.11Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The math: your adjusted basis at sale is the original basis minus all depreciation you claimed. Gain up to the amount of depreciation taken is taxed at up to 25%, and any remaining gain above your original basis is taxed at long-term capital gains rates. If you skipped depreciation in some years thinking you were doing yourself a favor, the IRS still recaptures on the “allowed or allowable” amount. Forgoing the deduction costs you now and doesn’t save you later.
The foreign country may also tax the sale. The Foreign Tax Credit can offset some of that, subject to the same limitation issue described above. Currency movement between purchase and sale adds another wrinkle, because gain is computed in U.S. dollars. A property that held flat in local-currency terms can still produce a taxable dollar gain, or a dollar loss, from exchange-rate movement alone.
Keep Records for Longer Than You Think
The usual three-year retention rule doesn’t fit depreciable property. You need to keep everything tied to the building until the statute of limitations closes for the year you dispose of it.12Internal Revenue Service. Publication 583 (2024), Starting a Business and Keeping Records Buy in 2026, sell in 2046, and you’re holding the purchase paperwork for roughly 23 years.
That means the purchase agreement, the closing statement, any appraisal used to allocate land and building value, receipts for capital improvements, exchange-rate documentation, and each year’s Form 4562. The land-versus-building split is worth guarding especially carefully; without proof of your original allocation, the IRS can push a larger share onto land, and that share doesn’t depreciate. A cloud backup separate from your local files is a practical way to make sure the records outlive the investment.