The Pros and Cons of Rental Properties Located Abroad

A primary residence is often a person’s first major investment, for the obvious benefits of its use and enjoyment while anticipating stable appreciation over time. It is a bedrock component of a diversified portfolio. Many people also view property as part of the family legacy that they wish to preserve and pass down.

You might have tremendous interest in property solely as an investment, as the owner can benefit from the capital appreciation and create reliable income over long periods of time. Many countries offer tax incentives to owning property as well. Property ownership is a well-trodden path to creating wealth.

Some of the ancillary reasons to own property abroad include the ability to diversify yourself geographically, both from an investment and a currency perspective; the flexibility to plan your global retirement; and the means sometimes to secure a visa or residency in a different country. Unfortunately, in some places as a non-resident, it can be sometimes difficult or more expensive to secure a mortgage, or there can be outright restrictions on foreign or non-resident ownership.

Maintaining a property is usually an expensive proposition. We all tend to focus on the rental income and discount the costs, which include income tax, property tax, maintenance, and insurance. Some of our clients actually do not even track the true net profit (or loss!) they are experiencing from the properties they own.

Being a landlord, and especially an absentee landlord, is never fun, and things do go awry. You must have a robust contact list of tradesmen. It may be best to hire a property manager, which would curtail your profits more.

You will need a bank account that can handle normal payment transactions in that currency, which often has to be opened in person.

Real estate will be taxed in the country where it is located, and rental income will be taxed as well in the U.S. You may need to file a tax return in both countries based on the rental income. Fortunately, there are often tax treaties so that the income is not double taxed, but the owner will end up paying the higher of the two countries’ taxes.

It is also common practice for a country to impose a higher property tax rate and a required rental income tax withholding on non-resident property owners, with the attendant higher administrative burden.

The U.S. requires that rental properties be treated as an investment and that depreciation expenses be deducted annually. Not all countries require or even allow depreciation. This will reduce your taxable rental income from a U.S. perspective, but you may end up with vastly different annual net taxable rental income between the U.S. and your home country.

Many countries have a capital gain exclusion for a primary residence but not necessarily for an investment property. The U.S. has this as well, up to a $500,000 limit for married tax filers and a $250,000 for single tax filers. The exclusion is lost if the home is not a primary residence for 2 out of the prior 5 years, so people who leave their homes and rent them out need to be aware of this.

As a U.S. taxpayer, your capital gain calculation starts as of the date of purchase, not the date that you became a U.S. resident.

As a cross-border property owner, there will be two sets of accounting rules for taxes and therefore potentially two different cost bases. To add insult to injury, there are also currency fluctuations in the mix. For example, from a U.S. perspective, everything must be reported in U.S. dollars at the exchange rate as of the transaction date, so the owner could potentially have a gain in one currency and a loss in another or may be creating an artificially larger tax liability in one country than the other. Discharging or refinancing a mortgage can also create gains or losses depending on the exchange rate at the time. What a headache!

Estate planning is an often overlooked area. Real estate will fall under the estate transfer laws of the country where it is located, regardless of the residency of the owner. Countries do have differing treatments regarding estate or inheritance taxes and even who is allowed to inherit, so planning on this front is essential.