Let's explore what you need to know about the taxation of real estate rental income, especially foreign real estate rental revenue.
Key Points
For a thorough understanding of the tax consequences of your rental property under U.S. law, you must understand the following taxation factors.
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The property's ownership – how do you acquire it? How you hold title to the real estate property may affect the tax calculation of your rental income and capital gains tax at the time of sale. If you acquired the property through a company or a trust, you must file additional IRS papers. If you inherit property, you may be required to complete form 3520. Sure Financial and Tax Services LLC can advise you on this matter.
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Nature of Rental Income - What kind of income does it represent? Your rental income from real property may be taxed or exempt. Your rental loss may or may not be deductible. All of these factors depend on the classification of rental real estate and rental income category. Consult with us for assistance with this. You must distinguish between revenue from personal property, income from investment property, and income from commercial real estate.
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Foreign currency conversion rate: When the real estate is located outside the United States, you must examine and account for whether or not the rental activity qualifies as a Qualified Business Unit for currency conversion purposes. This determination resulted in numerous taxing factors. Sure Financials and Tax Services, LLC can provide assistance with this.
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Depreciation: In order to determine rental income, you must deduct depreciation on the building in addition to other expenses. Depreciation calculations vary from country to country. Foreign property is depreciated differently when it comes to United States taxes. Cost of acquisition, cost of improvement, and authorized and permissible depreciation play a significant role in determining depreciation. The depreciation claimed as a tax deduction today may be taxable income at the time of real estate sale.
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A double taxation treaty with a foreign government stipulates that every U.S. citizen or resident alien gets taxed on their worldwide income, regardless of where it was earned. Consult Publication 901 for information on double taxation treaties. Form 8833, Treaty-Based Return Position Disclosure, may be necessary in certain circumstances. Regarding Section... This is a complex issue that requires the assistance of a tax expert.
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Credit for foreign taxes, if any: Every nation has its unique tax rules and computation method. If your rental property is located in a foreign country, you may be required to pay taxes on the rental real estate revenue to that country. Since U.S. citizens and permanent residents are taxed on their worldwide income, foreign rental income is also taxed in the United States. However, the good news is that you can claim the foreign tax you paid as a deduction or credit, with the credit being more advantageous. For more information, consult Form 1116 - About Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) or contact Sure Financials and Tax Services LLC.
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Expenses Related to Rental Activity: During your rental period, you may have incurred expenses, paid tax and interest, and incurred other costs. For permitted expenses, consult Schedule E - About Schedule E (Form 1040), Supplemental Income and Loss.
Regardless of your actions, you must keep records to verify your claim. Providing supporting paperwork is required if you are claiming cost-of-improvement depreciation.
At the time of the sale of the rental property, you are required to retain records of the purchase price, any upgrades, depreciation claimed in the past, and rental losses that were not permitted in the past.
Refer https://surefintaxsvs.blogspot.com/2022/05/irs-record-keeping-requirement.html for IRS record keeping requirement.
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