September 9, 2025
Own a condo in Baja, a flat in London, or an apartment in Tel Aviv but file taxes in San Diego County? The IRS expects you to report worldwide rental income, even if the property is overseas. Here’s a quick, practical guide.
✅Report foreign rental income on Schedule E
Report gross rents and deductible expenses on Schedule E (Form 1040). Convert all amounts to USD using an IRS-accepted exchange rate (annual average works for most landlords). Keep statements, leases, and exchange-rate support in your records.
✅Use the correct depreciation method
Foreign residential rentals must use ADS (Alternative Depreciation System) 30-year straight-line for property placed in service after 2017 (40-year for older placements). No bonus depreciation. Depreciation is typically computed on Form 4562. Remember: land is not depreciable.
✅Deduct ordinary and necessary expenses
Mortgage interest, property taxes, HOA/strata fees, insurance, repairs, management fees, travel for inspections, and utilities (if you pay them) are generally deductible on Schedule E. Convert each expense to USD and keep receipts.
✅Claim foreign tax credits
If you pay foreign income tax on the rental, you can usually claim a Foreign Tax Credit on Form 1116 (often better than a deduction). California taxes worldwide income but does not offer a foreign tax credit, so plan cash flow accordingly.
✅Watch the information returns
- FBAR (FinCEN 114): Required if your foreign bank accounts (including the rental’s account) exceed $10,000 in aggregate at any time during the year.
- FATCA/Form 8938: Directly held real estate isn’t reported, but interests in foreign entities (and foreign financial accounts) are.
- Form 8858 (big update): You may need Form 8858 even when you own the property directly, not just through a foreign entity, if your rental activity rises to a “foreign branch/QBU” (for example, separate books/records, regular business operations, local office/agent). Penalties for missing 8858 can be severe.
- Other entities: Foreign corporations/partnerships can trigger Forms 5471/8865.
✅Passive activity loss rules
Losses may be limited under PAL rules but can carry forward. Real estate professionals have special provisions—ask us to evaluate your facts.
San Diego tip: Cross-border owners (e.g., property in Mexico) face currency swings, local withholding, and unique documentation. Tight bookkeeping and coordinated U.S.–foreign returns save headaches.
Need help?
USIBTS in Carlsbad helps San Diego landlords with foreign rentals file correctly, optimize depreciation, and capture credits – while avoiding IRS penalties.
Contact us for a consultation.
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