Thousands of Americans purchase real estate abroad every year, whether to use as a winter retreat, because they are relocating abroad permanently, or as an investment.
The US taxes based on citizenship, which means all its citizens (and Green Card holders) have to file a federal US tax return every year. Regardless of where you call home, the US government wants to know your global income. Paying taxes in another country or any international tax treaties do not prevent Americans living abroad from having to file US taxes. Instead, Americans abroad can claim IRS credits and exclusions when they file their US return to reduce their US tax bill.
Purchasing real estate abroad can trigger additional filing requirements. Let’s look at some of the US tax reporting implications of buying real estate abroad.
When Americans transfer money abroad to purchase real estate, they may inadvertently trigger a foreign account reporting requirement known as a Foreign Bank Account Report, or FBAR, filing.
FBAR is a requirement for Americans who have over $10,000 in total in foreign registered financial accounts that they have signatory authority over at any time in a year.
The threshold applies to the person, not to any individual account, and it includes accounts that may not be registered in their name, such as a business account.
This means that if an American transfers funds for the purchase of foreign real estate to a foreign bank account that they have signatory authority over, even if the funds are only in the account very briefly, then they will have to file a FBAR.
FBARs are filed to the US financial crimes authority rather than to the IRS. Penalties for not filing FBARs start at $10,000 for unintentional missed or incorrect filing, and most foreign banks are reporting the same information to the US government directly, so it’s an important requirement to be aware of.
For some, it may make sense to transfer funds directly to the real estate vendor. We’ll cover the different considerations for the most cost effective and efficient way to make global payments or money transfers further down.
The Foreign Account Tax Compliance Act, or FATCA, is a 2010 US law that requires Americans who have foreign financial assets to report them on IRS Form 8938 when they file their federal return. Similar to a FBAR filing, if an American transfers funds to their own foreign bank account when buying real estate abroad, they may trigger this filing requirement.
An FATCA filing is triggered when a person’s total overseas financial accounts (including individual pension, investment accounts and bank accounts) reach two thresholds. If you are an American residing in the states, the FATCA filing is triggered at $50,000. If you’re living abroad, the threshold is $200,000.
Property owned by a company or trust
Americans who create a foreign company or trust to purchase real estate abroad will also trigger additional filing requirements for Americans who own or control foreign entities. This is true whether the American is a US or overseas resident.
Reporting rental income
As all Americans have to report their global income on Form 1040 every year, those who receive rental income from foreign real estate will need to convert their foreign rental income and expenses into US dollars using a recognized exchange source and declare it on their US tax return.
OFX provides a currency converter, but bear in mind that exchange rates are always shifting. Save money on your global money transfers when you get an account with OFX, and access bank-beating rates and local human service to help you each step of the way.
It’s worth noting that selling foreign real estate can trigger a US capital gains tax liability, depending on the individual’s total capital gain in that year, as the tax is applied globally.
Filing US taxes from overseas is more complex than filing in the states, and we strongly recommend that Americans living abroad or purchasing foreign real estate seek advice from a US expat tax specialist.
Feel at home with global money transfers
As mentioned above, it may make sense to transfer funds directly to the real estate vendor to avoid triggering the requirement to file a FBAR. Managing your money globally doesn't have to be complicated. OFX can help you navigate issues and complexity, breaking foreign exchange down so it's simple and easy to understand for your real estate purchase.
It is important to research foreign exchange rates, as well as the fees associated with sending your money abroad. Our OFX spot transfers are a fast, simple option for transferring at the current rate of exchange. You can book a spot transfer online, in the app, or over the phone. You can send the payment directly to the real estate closing vendor.
Need currency confidence? Our OFXperts can help you navigate the ins and outs of exchange rates with Forward Contracts, Limit Orders, and other advanced currency tools.
Protect against market movements with our OFX Forward Exchange Contract and lock in your rate for up to 12 months. If the market rate is in your favor, but you aren’t ready to make your payment, you can lock in the exchange rate with a Forward Contract; meaning you pay the full amount at a later date or divide it into smaller payments over 12 months. This may protect you against market movements, specifically a depreciation in the value of the currency you are holding.
Set the exchange rate that suits your business with an OFX Limit Order. When your target rate is reached, an OFXpert will be in touch to complete your transfer. It's that simple.
Whether you want to transfer money, make a plan for a future currency exchange or just ask a question (we love questions), our OFXperts are here to help you feel confident about your next move. Give us a call 24/7.
Allyson Lindsey is a Partner and Managing CPA at Bright!Tax (brighttax.com), an award-winning, leading provider of US tax services for Americans living abroad.
Jason Landrum manages strategic partnerships for OFX, an international transfer and payments platform. He can be reached at Jason.email@example.com or (704) 575-8433.