Foreign Rental Property Tax Depreciation

Do you own, or are you thinking of owning, foreign rental property?  While investing in foreign rental property may have many advantages and can be a potentially lucrative enterprise, you should be aware that, among other aspects, the IRS treats rental properties located outside of the United States differently than rental properties in the United States with respect to the depreciation deduction.  This article explains some of the basic differences in the depreciation treatment of such properties.

Depreciating US Residential Rental Property

The IRS defines “residential rental property” to include rental buildings or structures for which 80% or more of the gross rental income for the tax year is from dwelling units.

In general, for residential rental property located within the United States, taxpayers must depreciate the property using the straight-line method over 27.5 years.   Furthermore, the mid-month convention for residential rental property should be used.  In the first year that depreciation is claimed for residential rental property, it can be claimed only for the number of months the property is in use as a rental.

Depreciating Foreign Residential Rental Property

The IRS rules for depreciating residential rental property located outside the United States, however, are different.  Under IRC section 168(g)(1)(A), “any tangible property which during the taxable year is used predominantly outside the United States” must use the alternative depreciation system.  When using the alternative depreciation method specified in the Internal Revenue Code, foreign rental properties must be depreciated over a much longer 40 year period.  This means that the depreciation that may be deducted for a foreign rental property will smaller than if the same property (at the same purchase price, disregarding currency fluctuations) were located within the United States.

Contact Sherayzen Law Office For Legal Help With Rental Properties

There are other potentially complex issues relating to foreign and US residential rental properties that are beyond the scope of this general explanation, as this article only attempts to provide background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced international tax firm will guide you through the complex web of rules concerning your U.S. and international tax needs.