U.S. taxes on foreign rental property
My wife (a permanent resident) owns a rental property in Mexico.
She is a Mexican citizen. Do we have to pay U.S. tax on the rental
income earned in Mexico? We pay Mexican taxes on this property.
All citizens and residents are required to declare their worldwide
incomes on their individual income tax returns. This means that
you and your wife should complete Schedule E of Form 1040 for the
rental property in Mexico. You would include the rental income at
the prevailing exchange rates when received and similarly translate
your expenditures. You would be entitled to all the ordinary and
necessary expenditures related to the rental, such as repairs, insurance,
property taxes, maintenance, etc.
You would also be entitled to depreciation deductions
for the cost of the property. Usually you recover the cost of a
rental over 27.5 years, but since the property is located outside
the country, you're required to depreciate the cost over 40 years.
For example, if the property cost $250,000, of which you allocate
$50,000 to nondepreciable land, you would claim $5,000 ($200,000
divided by 40) per year for depreciation.
You can also claim additional expenses, such as long-distance
telephone calls and travel related to managing the property. If
you pay income taxes to Mexico related to the rental income, you
can either claim a deduction for these taxes or a credit against
your U.S. income tax liability. If there is little or no profit
from the property, a deduction for the taxes paid may be able to
lower your overall U.S. tax more than a credit would. Alternatively,
a credit might be more valuable as a carry-over against future gains
from the property.
You should review these alternatives with a tax professional when it comes time to prepare your taxes.
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