6 Ways Owning Property Abroad Can Save You Money on Taxes

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You may have heard of retirees moving away for the winter or retiring to a warmer country altogether, but did you know that there are ways you can save money on taxes by owning property abroad? The good news is that investing in non-American property can save you money on your domestic taxes.

Here we will look at the different ways that owning property abroad can save you money on your U.S. taxes.

How To Save Money on Taxes With Foreign Real Estate

U.S. taxes are on a citizen-based system, so you will have to file an annual tax return with the IRS regardless of where you move as long as you maintain your citizenship. If you’re looking to move abroad or are considering investing in foreign property, there are ways that you can save money on taxes.

Claim Deductions on the Property You Live in

Your foreign property will allow similar deductions to those you have in the U.S. so that you can file additional deductions on your tax bill. You can also claim the home office deduction if you run any business operation out of your home. 

It’s important to remember that you can’t claim home-related expenses on your taxes, like utilities or basic maintenance. You also can’t claim foreign property taxes on your stateside taxes.

Claim Deductions on Rental Properties

If you own a rental property abroad or want to start a short-term rental business in another country, you can get some tax breaks back home. Your property abroad will be similar to U.S. property regarding taxes. While you have to report the rental income, you also can apply for the same deductions on expenses, from the mortgage interest to any reasonable expenses related to the property. 

You can even deduct the expenses of traveling to visit your overseas property. Many investors will try to purchase an investment property in a destination they want to vacation to for tax incentives.

Access to a Low-Tax Jurisdiction.

Relocation to a lower tax jurisdiction is an option for decreasing your tax bill. Some countries (i.e. Belize, Panama, and the Dominican Republic as the most popular options) will grant you temporary residence if you purchase real estate.

If you’re looking to switch up your environment or contemplating retiring, you can consider one of these options. Countries like Panama and Belize tax jurisdictionally so that you’ll only pay taxes on the income earned in the country.

1031 Like-Kind Exchange

The U.S. has categorized any property outside of the country as a like-kind with another property outside of the U.S., so you can sell a home in Poland and purchase another in Costa Rica. This tax loophole allows you to defer the taxes on your capital gains from selling real estate by returning the money to another overseas property.

It’s important to remember that specific rules must be followed for this. This won’t work if you try to sell a property abroad and then attempt to use the proceeds domestically. This also works best if the country you’re selling the property in doesn’t charge capital gains tax.  

Capital Gains Taxes

If you lived in a foreign property for at least two of the last five years, you could be exempt from paying capital gains up to $250,000 and $500,000 if you’re married. So this means that if you see an investment opportunity in a foreign real estate, you can live there for the allotted time and flip it.

Claim the Foreign Tax Credit (FTC)

There’s a Foreign Tax Credit that helps you with double taxation. The FTC will reduce your tax bill by a dollar for every equivalent dollar that you’ve put toward foreign taxes. This means that if you run a rental property business overseas, you can avoid double taxation by taking a tax credit on your domestic taxes based on the money you spent in the foreign country. 

You can also use your foreign taxes paid as an itemized deduction. This deduction will allow you to decrease your taxable income in the U.S. and help you save money on taxes. Many experts recommend taking the FTC as a credit. It’s important to note that there’s a limit to the available tax credits, and you can’t use a credit that exceeds your domestic taxes on the rental property income after the expenses.

What To Consider Before Buying Property Abroad

As tempting as it can be to purchase property abroad, there are still several factors to consider so you don’t find yourself in a complex financial situation. 

Citizenship or Residency Requirements

Every country also has its own residency laws that you must be aware of when it comes to purchasing a property. There are also residency requirements and visa laws for entering and exiting the country. You want to ensure that you can visit your foreign property as often as you would like.

Foreign Tax Laws Can Be Confusing

It’s important that you consult with a tax professional so that you’re aware of all tax liabilities. While you can save money on your American taxes, there could be various tax liabilities with purchasing a foreign property. You will have to learn about property taxes, property transfer taxes, and any other taxes. It’s important to be aware of the double taxation treaties in place.

Closing Thoughts

If you’re looking for property abroad to vacation, rent out or retire in, you can get some tax deductions on your domestic taxes. However, as always, we suggest you consult with a tax professional before making a decision that could drastically alter your tax situation. Moving abroad or investing in another country can have serious implications on your life.

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