It may be advisable to buy property in a corporation. It saves you from the hassle of filing separate business tax returns, avoids the accounting fees and also limits your liability since for tax purposes an individual is considered a “disregarded entity”. However, bear in mind that any foreign income earned through the property such as rentals are subject to US taxation. Also, ensure that you take a mortgage on the property as the interest and points are deductible from U.S.-sourced income on your U.S. expat tax return. The mortgage provider can also provide you with a detailed annual transaction report for tax purposes. Additionally, before you make the down payment seek guidance from a professional broker for beneficial exchange rates and lower transfer fees. Finally, consider holding on to the property for at least 2 to 5 years as you can discount a profit of up to $250,000 from your tax returns, if certain conditions are met.
Apart from the benefit of a healthy rental income that a vacation home abroad generates, U.S expats are not required to report the value of real estate or real property to the IRS or FinCen for Foreign Account Tax Compliance Act (FATCA) purposes. The rental income can pay off the monthly mortgage and other expenses. However, pay particular attention to the tax rate as a non-U.S. resident. The purpose of buying the property can have further tax implications as there is a 30 percent withholding tax levied on the real estate income. If the property is rented out, all deductions and losses can be claimed on your U.S. taxes and could defer the holding costs without adding taxes. Moreover, buying property abroad can insulate you from the uncertainty and systemic risks associated with the U.S stock market, as you would be diversifying your investment portfolio. And of course, the by-product is a foreign residency.
For tax purposes, U.S expats are considered residents if they stay for 31 days during the current calendar year or a total of 183 days during the current plus the two preceding years. It would imply that they would not be eligible for tax deductions and exclusions given to overseas residence owners. So it is in your best interest to consider the number of days you spend in the U.S.
To navigate through the complex tax regulatory system and to stay compliant with it, we would recommend U.S expats to seek expert and professional advice either from an accountant or a lawyer, in some cases both. They can also make you aware of how to take advantage of the deductions while filing for U.S. tax returns.
