If you’re a U.S. citizen or resident alien and you own property overseas, foreign real estate tax rules reach you on two fronts: the IRS taxes your worldwide income, so rent and sale gains from that property flow onto your U.S. return, and separate reporting forms can apply to the property or the accounts around it even in years you earn nothing from it. Foreign taxes you pay on the same income can usually be credited against your U.S. tax, which prevents double taxation but rarely eliminates the U.S. filing work.
Reporting Rental Income From a Property Abroad
Rental income from a foreign property is taxed the same way as domestic rental income. Gross receipts go on Schedule E of Form 1040, converted to U.S. dollars at the exchange rate for the period you received the money.1Internal Revenue Service. Topic No. 414, Rental Income and Expenses Against those receipts you deduct ordinary and necessary expenses: maintenance, insurance, management fees, advertising, and taxes paid to the foreign government.2Internal Revenue Service. Publication 527 (2025), Residential Rental Property
Foreign property taxes on a rental have always been deductible on Schedule E, even during the 2018–2025 period when personal-use foreign property taxes were blocked. The statute that imposed that block carved out taxes “paid or accrued in carrying on a trade or business,” which includes rental activity.3GovInfo. 26 USC 164 – Taxes
Three things make the after-tax math on a foreign rental worse than on a domestic one:
- Depreciation runs longer. Foreign residential rental property uses the Alternative Depreciation System, with a 30-year recovery period instead of the 27.5 years that applies to domestic residential rentals. The annual write-off is roughly 9% smaller than for an equivalent U.S. property.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
- The 3.8% Net Investment Income Tax applies to passive foreign rental income when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately), and is reported on Form 8960. Most foreign rentals fall on the passive side because the owner isn’t materially participating from abroad.5Internal Revenue Service. Instructions for Form 8960 Net Investment Income Tax
- The 20% Section 199A qualified business income deduction is not available. The IRS excludes income that isn’t effectively connected with a U.S. trade or business from the QBI calculation.6Internal Revenue Service. Qualified Business Income Deduction
Selling Foreign Real Estate
A sale triggers the same capital gains rules as selling a domestic property. Your gain is the sale price minus your adjusted basis (original purchase price plus capital improvements), with each figure converted to U.S. dollars at the exchange rate in effect at the time of the transaction. Property held more than a year qualifies for long-term rates, which for 2026 are:
- 0% on taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% on taxable income above those thresholds up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
- 20% on taxable income above the 15% thresholds.7Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
Section 121 Exclusion for a Main Home
If the foreign property was your principal residence, you can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) under Section 121, provided you owned and used the property as your main home for at least two of the five years before the sale.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence For married couples, both spouses must meet the use test, and at least one must meet the ownership test.9Internal Revenue Service. Topic No. 701, Sale of Your Home The exclusion doesn’t care where the home sits. A primary residence in Mexico City or London qualifies just as one in Chicago would.
No Like-Kind Exchange Across the Border
Section 1031 does not let you defer gain by swapping a U.S. property for a foreign one. The statute states that real property in the United States and real property outside the United States “are not property of a like kind.”10Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Selling a rental in Texas and buying one in Portugal will not defer the gain. An exchange of one foreign investment property for another foreign investment property isn’t blocked by that provision, though the practical difficulty of structuring such an exchange makes it rare.
Property Tax on a Personal Home Abroad
From 2018 through 2025, the Tax Cuts and Jobs Act flatly prohibited deducting foreign real property taxes on a personal-use home. The statute drew a hard line: foreign real property taxes “shall not be taken into account” as an itemized deduction on Schedule A for those years.3GovInfo. 26 USC 164 – Taxes That provision applied through tax years beginning before January 1, 2026.
For 2026, the picture changes. The One Big Beautiful Bill raised the state and local tax (SALT) deduction cap from $10,000 to $40,400 ($20,200 for married filing separately), with a phase-out starting at $505,000 of modified adjusted gross income.11U.S. House of Representatives. Frequently Asked Questions: Tax Changes 2026 and the One Big Beautiful Bill Because the blanket TCJA prohibition on foreign property taxes expired alongside other individual provisions, foreign property taxes on a personal home abroad should once again count toward the SALT cap. Property taxes paid to a French local government on a vacation home in France, for example, can be included in the itemized SALT deduction up to the cap, the same way domestic property taxes are.
This only matters if you itemize. The 2026 standard deduction remains high, and if your combined state income taxes, domestic property taxes, and foreign property taxes fall below it, the deduction gives no practical benefit.
Foreign Currency Gains on Your Mortgage
Currency movement between the day you take out a foreign-currency mortgage and the day you pay it off can produce a taxable gain even when you haven’t made a dollar in economic terms. Borrow €200,000 when the euro trades at $1.10, and your loan equals $220,000 in dollar terms. Pay it off years later when the euro has fallen to $1.00, and you spend $200,000 to retire the debt. The IRS sees a $20,000 gain because you satisfied a $220,000 obligation for $200,000. For mortgages tied to a trade or business, Section 988 treats the difference as ordinary income.12Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions
Personal residences follow different rules. Section 988 doesn’t apply, and the mortgage is treated as a separate personal transaction. The result is a whipsaw: currency gains on the mortgage payoff are taxable as capital gains, but currency losses are not deductible. Individual taxpayers can ignore foreign currency gains of $200 or less on any single personal transaction.
Currency movements also change your basis calculation on a sale. Buy a property for €300,000 when the rate is $1.10 (basis of $330,000) and sell for €350,000 when the rate is $1.20 (proceeds of $420,000), and the taxable gain is $90,000 in dollar terms, not the €50,000 gain you experienced locally.
Claiming a Credit for Foreign Taxes Paid
When a foreign country taxes the same rental income or capital gain, the foreign tax credit prevents most double taxation. The credit is limited to income taxes, war profits taxes, or excess profits taxes paid to a foreign government. General property taxes do not qualify for the credit, though they may be deductible as expenses on Schedule E for a rental or, starting in 2026, on Schedule A for a personal home.13Internal Revenue Service. Instructions for Form 1116
The credit is calculated on Form 1116, with income sorted into categories (passive for rental income and investment gains, general for most other categories) and a separate Form 1116 for each. The credit cannot exceed the U.S. tax attributable to your foreign-source income, so a foreign rate higher than your effective U.S. rate won’t produce a dollar-for-dollar offset. Excess credits carry back one year or forward ten.13Internal Revenue Service. Instructions for Form 1116 Keep official receipts from the foreign tax authority, converted to U.S. dollars using the exchange rate for the date of payment.
Reporting Forms That Apply Even Without Income
Owning foreign real estate can trigger reporting obligations that have nothing to do with whether the property produced income. The penalties for missing them are disproportionate to the underlying activity, so the forms are worth knowing about before a filing deadline arrives.
Form 8938 (FATCA)
Foreign real estate held directly in your own name is not a “specified foreign financial asset” and does not go on Form 8938.14Internal Revenue Service. Basic Questions and Answers on Form 8938 This surprises people who assume every foreign asset must be disclosed. If you hold the property through a foreign corporation, partnership, or trust, your interest in that entity is a specified foreign financial asset, and reporting kicks in once total specified foreign financial assets exceed:
- $50,000 on the last day of the tax year, or $75,000 at any point, for a single filer living in the U.S.
- $100,000 on the last day, or $150,000 at any point, for married filing jointly in the U.S.
- $200,000 on the last day, or $300,000 at any point, for a single filer living abroad.
- $400,000 on the last day, or $600,000 at any point, for married filing jointly abroad.15Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets
Failing to file Form 8938 draws a $10,000 penalty, with an additional $10,000 for every 30-day period the failure continues after the IRS sends a notice, capped at $50,000 in additional penalties.16eCFR. 26 CFR 1.6038D-8 – Penalties for Failure to Disclose
FBAR (FinCEN Form 114)
The FBAR covers different ground from Form 8938. You must file FinCEN Form 114 if you have a financial interest in or signature authority over foreign financial accounts whose aggregate value exceeds $10,000 at any time during the year.17FinCEN.gov. Report Foreign Bank and Financial Accounts Foreign financial accounts here means bank accounts, brokerage accounts, and mutual funds held at foreign institutions.18Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) The real estate itself is not a financial account, but a foreign bank account used to collect rent or pay property expenses counts toward the $10,000 threshold. The FBAR is filed electronically through FinCEN’s BSA E-Filing system rather than with your tax return, and the deadline is April 15 with an automatic extension to October 15.
Form 8865 (Foreign Partnerships)
Holding foreign real estate through a foreign partnership can trigger Form 8865, with filing categories based on your level of control, ownership, and contributions to the partnership.19Internal Revenue Service. Instructions for Form 8865 If your foreign property is held inside a partnership, work through the form’s four categories with a preparer before filing season.
Form 3520 (Gifts and Inheritances From Foreign Persons)
Receiving foreign real estate as a gift or inheritance from a nonresident alien individual or a foreign estate requires reporting on Form 3520 when the total value of gifts from that person exceeds $100,000 in the tax year.20Internal Revenue Service. Gifts From Foreign Person The gift itself generally isn’t taxable to you, but the reporting requirement has its own penalties. This catches people who inherit a family home overseas without realizing the IRS wants to know.