5 Surprising Tax Benefits of Overseas Homeownership

Owning a home abroad is a gateway to endless possibilities. It means having your own retreat in an exotic location, immersing yourself in new cultures, and creating unforgettable memories. It can also even provide opportunities like temporary residency in some countries.

And here’s the bonus: there are tax benefits that make overseas homeownership for Americans not just appealing but financially rewarding too. 

Foreign Real Estate Isn’t Considered a Financial Asset by the IRS

Americans, whether living at home or abroad, need to declare most of their assets on their tax forms (and those who are overseas can easily use Expat File tax software to digitally file their tax returns and FBAR within minutes). But there are some assets that don’t need to be included.

In addition to collectibles and physical precious metals (with a few exceptions), property outside of the U.S. held in your personal name doesn’t need to be declared.

According to the IRS, foreign real estate isn’t considered a specified financial asset. This means you won’t need to report it on Form 8938.

This rule opens doors for Americans seeking financial flexibility overseas. You could buy a charming rental property in an affordable destination and generate income while potentially enjoying capital appreciation.

Or think about this – your overseas property might double as your own vacation retreat, No extra rental fees – just the comfort of your own place in paradise.

You Can Maximize Tax Deductions with an Overseas Rental Property 

For U.S. tax purposes, foreign rental properties are treated much like domestic ones. Rental income is reported on Schedule E, and landlords can claim standard deductions for expenses like repairs, property management fees, and more.

Here’s an added bonus: travel costs to check on the property are deductible. If you invest in a place you enjoy visiting, every trip serves both personal and financial goals.

Mortgage interest payments? Deductible from taxable income – just like with U.S. homes. Depreciation differs slightly, though: it follows a 40-year schedule instead of 27.5 years.

U.S. expats benefit even more with the Foreign Housing Exclusion (FHE). This excludes significant housing-related costs from taxable income in high-cost areas abroad as outlined annually by the IRS – covering rent, utilities, repairs, or employer-provided lodging.

You Could Defer Taxes with a 1031 Like-Kind Exchange 

The 1031 like-kind exchange offers overseas property owners a chance to defer capital gains taxes when reinvesting in foreign real estate. By following specific IRS rules, the proceeds from selling one foreign property can be used to purchase another, delaying tax liability.

The exchange only works between foreign properties – not U.S. and foreign ones. 

This strategy works best in countries without capital gains taxes on property sales, maximizing your financial advantage.

If you’re selling in a country with high capital gains taxes, it might be smarter to use the Foreign Tax Credit instead – offsetting those paid abroad against your U.S. tax bill.

You Can Reduce Double Taxation with the Foreign Tax Credit 

The Foreign Tax Credit (FTC) helps Americans offset U.S. income taxes by crediting taxes paid to foreign governments on their worldwide income. This isn’t limited to wages – income from dividends, interest, rent, or capital gains qualifies too.

One major advantage of the FTC is it reduces double taxation. For instance, if you’re taxed on rental income abroad, you can apply those foreign taxes as a credit against your U.S. tax liability.

However, it’s important to note that the FTC and the Foreign Earned Income Exclusion (FEIE) cannot be used for the same earnings. In some cases though, any amount exceeding FEIE limits may still qualify for an FTC claim.

This flexibility allows Americans abroad to manage complex international tax obligations efficiently.

You Could Gain Temporary Residency Status Overseas

In some countries, purchasing property comes with an added perk: temporary residency. Places like Panama, Belize, Greece, and Montenegro offer residency-by-investment programs that make relocating easier for buyers.

For Americans considering a move abroad, this can mean more than just a lifestyle change. Choosing a low-tax jurisdiction could significantly reduce your tax obligations.

Panama and Belize are standout options because they only tax income earned within their borders. Even as a resident there, any U.S.-sourced or other foreign income stays untouched by local taxes.

By combining homeownership in these destinations with strategic financial planning, it’s possible to cut down – or even eliminate – your global tax burden while enjoying the benefits of legal residency! 

The Takeaway

Owning property overseas offers more than just a new address – it’s an opportunity for adventure, income, and smart financial planning. 

Whether you’re enjoying vacations in your own home, gaining residency abroad, or reaping tax advantages like deductions and credits, the benefits are substantial. 

With careful strategy and an eye for the right location, this move can enhance both your lifestyle and long-term finances. 

Exploring overseas ownership isn’t just about buying property. It’s also about investing in a world of possibilities! 

Read more: Hidden costs of homeownership

Written by Billy Guteng. December 6, 2024

Billy is a content writer for Kukun. He was born in France, and has lived in multiple cities around the world ever since. He loves art, design and architecture as well as construction and real estate.