Tax Tip Tuesday: Foreign Rental Income Reporting Basics

Foreign rental property owned by a US taxpayer subject to Schedule E reporting

Own a condo in Manila, a flat in London, or a rental house in Guadalajara? If you're a US citizen, green card holder, or resident alien, the IRS wants to hear about the rent you collect on it — no matter where that property sits or what currency the rent shows up in. Here are the basics of reporting foreign rental income correctly, so a straightforward income stream doesn't turn into a compliance headache.

1. Yes, You Have to Report It

The US taxes citizens and residents on worldwide income. That means foreign rental income is reportable in the same year you earn it, whether or not:

•      The rental agent ever sends you a US tax form

•      You leave the funds in a foreign bank account instead of transferring them home

•      The property is jointly owned with a non-US spouse or family member

There's no minimum threshold that lets foreign rental income skip the return — $200 of net rent from a beach bungalow is just as reportable as $20,000 from a city apartment.

2. Where It Goes on Your Return

Foreign rental income and expenses are reported the same way domestic rental property is: on Schedule E (Supplemental Income and Loss), which flows to Form 1040. You'll report:

•      Gross rents received for the year

•      Ordinary and necessary expenses — property management fees, repairs, insurance, local property taxes, utilities you pay as landlord

•      Depreciation (see below)

A common misstep is reporting only the net amount that actually gets wired home. The IRS wants gross rents and itemized expenses on Schedule E — not just the leftover cash.

3. Currency Conversion: Pick a Consistent Method

Rental income and expenses paid in a foreign currency must be converted to US dollars. Two acceptable approaches:

•      Use the exchange rate on the date each transaction occurred, or

•      Use the annual average exchange rate published by the IRS or the Treasury's Bureau of the Fiscal Service

Example: A client collects €1,500 per month on a Lisbon apartment. Using the 2025 average EUR/USD rate of roughly 1.08, that's about $1,620 per month, or $19,440 in gross rental income for the year — the figure that goes on Schedule E. Whichever method you choose, apply it consistently year to year.

4. Depreciation Rules Are Different for Foreign Property

This is the detail that trips up the most taxpayers. Foreign residential rental property does not use the standard 27.5-year US depreciation schedule. Instead:

•      Foreign residential rental property placed in service after December 31, 2017 is depreciated over 30 years under the Alternative Depreciation System (ADS)

•      Foreign residential property placed in service before 2018 generally uses a 40-year ADS life

•      Foreign nonresidential (commercial) property is depreciated over 40 years

Example: A $400,000 foreign rental (excluding land value of $80,000, leaving $320,000 depreciable basis) placed in service in 2022 generates roughly $10,667 a year in depreciation over 30 years — compared to about $11,636 a year if it were a US property depreciated over 27.5 years. The difference is small per year, but using the wrong schedule creates a basis and recapture problem down the road that's expensive to unwind.

5. Foreign Tax Paid on the Rental May Be Creditable

If the country where the property is located taxes the rental income too, you may be able to claim a Foreign Tax Credit on Form 1116 for the foreign income tax paid, which helps prevent double taxation on the same rental income. This is a separate calculation from the property itself and depends on your overall foreign income basket and limitation.

6. Don't Forget the Foreign Asset Reporting Layer

Reporting the rental income on Schedule E is only one piece. Depending on how the property and rental proceeds are held, additional forms may be triggered:

•      FBAR (FinCEN Form 114) — required if you have signature authority over foreign financial accounts (including a foreign bank account that collects the rent) with an aggregate value over $10,000 at any point in the year

•      Form 8938 (FATCA) — required if foreign financial assets exceed the applicable reporting threshold for your filing status and residency

•      Form 5471 or 8865 — if the property is held through a foreign corporation or partnership rather than directly in your name

Note that directly owned real estate itself is not a “specified foreign financial asset” for Form 8938 purposes — but the foreign bank account holding the rental proceeds usually is.

Planning Takeaways

•      Report gross rents and expenses on Schedule E every year the property is rented, even if the cash stays overseas

•      Confirm you're using the correct 30- or 40-year ADS depreciation life before your first return for the property, since correcting it later usually requires a Form 3115 accounting method change

•      Track foreign income tax paid on the rental separately so it's ready for Form 1116

•      Review your foreign account balances each year to see if FBAR or Form 8938 thresholds are triggered

If you're new to owning foreign rental property, loop in your tax preparer before year one of renting it out, not after — the depreciation method and reporting structure are much easier to set up correctly from the start.

Have foreign rental property and want a second set of eyes on how it's being reported? Reach out to us at info@mkhstaxgroup.com — we work with clients on cross-border and international reporting every day.