If you are considering working, retiring, or marrying overseas, you must have questions about how to best manage your financial affairs back in the US.
In the second post of this series I’ll call “what to do when I move overseas”, we will discuss what to do with your US real estate when you move overseas.
(You might also be interested in the first post of this series: What to do with my US investment accounts when I move overseas.)
Generally speaking, you are able to continue to own the real estate the same way as if you are still living in the US full-time. The real estate title records your legal ownership of the property, and you continue to pay off a mortgage if you have one.
What to do with my US real estate when I move overseas?
What doesn’t change
If you hold an investment property in the US, you need to declare rental income whether you live in the US or maintain tax residency. As a US tax resident overseas, you only get a federal tax exclusion on earned Income, not income generated through owning US property.
The good news is that owning an investment property can be considered a business activity. This means that you are able to deduct expenses, including maintenance, mortgage interest, and even depreciation on the property, from rental income. In effect, you only pay taxes on the “profit.” For some people, after all the deductions you may have no profit so you do not have a current tax liability until you sell the property. At sale, you will pay taxes on capital gains and depreciation recapture.
You also continue to pay state-based property taxes and most likely rental profit connected to the in-state property.
Planning Opportunities
So what changes when you own US-based properties while living overseas? The main points of planning consideration that have significant financial implications are:
- Are you turning a primary residence into an investment property by moving overseas?
- Are you becoming a tax resident in another country?
- Are you giving up US citizenship or permanent residency after moving overseas?
Turning primary residence into investment property
If you will rent out your US-based home, you will turn your primary residence into investment property. Currently the US tax code has favorable treatment toward capital gains when you sell a primary residence. If the property is considered a primary residence when you sell, each spouse excludes $250,000 from capital gains. This means many people don’t pay taxes when they sell their home.
Right now in order to qualify for the exclusion, you need to live in the property in two out of the last five years, or qualify under special circumstances.
If you own a home that has significantly appreciated and have no reason to own the property for the long-term, you may want to consider selling the property while you still qualify for exclusion. Of course, avoiding taxes shouldn’t be your ultimate goal. You should do the calculation on the potential return after taxes before you make the decision.
In addition, if there is a possibility that you may return to live in your US home again, you may again start the clock on counting it as your primary residence. IRS has a specific formula to calculate the pro-rata share of capital gain that may be excluded from taxes.
Lastly, owning the property may also play in the decision of which state you want to maintain residency. Some states have property tax relief if you are a resident, but may require you to pay income taxes on your overseas income. Do an overall analysis on which state to maintain residency to minimize the overall cost.
Tax liability in another country
Income
Another consideration is whether your rental income will be taxed in your new resident country. Some countries have a tax treaty with the US that covers what country gets the revenue. Most of the time under the treaties, you pay taxes in the country where the business income is generated. Confirm this for the country you live in.
Without a treaty, it is possible your new resident country may tax your worldwide income, not just income derived from your residency. You need to find out whether to report your US-based rental income in another country, and whether it is considered a business activity so you are able to deduct expenses.
The good news is that under the US system, if you have paid income taxes to another country on the same income that you get taxed on in the US, you are able to receive a foreign tax credit. This will reduce your US tax liability.
Estate
If your move overseas is long-term, you may also need to plan for estate tax and transfer in the event of your passing. Many neglect this part because they are young or plan to return to the US, but there is always a possibility for unexpected death overseas.
Again, if your new tax resident country has a treaty with the US, consult the specific rules on which country handles the property in your estate. After the new tax reform takes effect, most people will not have to worry about estate taxes at the federal level. However, your other tax resident country may impose a tax on all estate transfers even for assets outside of the country. Make sure you understand the rules and work with a qualified local estate attorney to structure the transfer in legal documents.
It is likely if you remain overseas that you will need two sets of estate documents, one for the US and one for the other country. Make sure those two sets of instructions are coordinated and comply with the laws in each country.
Own US property as Non-resident Alien
So far what we’ve discussed mostly applies to US tax residents moving overseas but retaining citizenship or permanent residency. What if you are exiting permanently?
As you may be aware, there are many foreign investors that own US investment properties and make the news, so you definitely are able to do it. The question is, how do you structure it to minimize the cost and maximize the return.
First of all, owning US real property as a non-resident alien (NRA) has the following upsides and downsides:
- If you own the property directly, or through a US corporation or trust, you will be subject to US estate taxes without the exemption available for US citizens. The estate tax schedule is pretty steep so most people want to avoid it.
- You are also subject to the US gift tax if you gift the real estate ownership directly before death. However, if you own the property through partnership or company, gifting corporate stocks or partnership interest is not taxable.
- Rent received by NRA on US property is taxable as US-sourced income, and may be considered effectively connected to business or trade.
- Under FIRPTA, NRAs selling real estate are subject to U.S. income tax, usually at capital gains rates. There is also a mandatory withholding requirement from rental income or sales proceeds. This requires the NRA to file tax returns to receive a refund.
If you are already dizzy from reading this, you are not alone. Real estate investing from foreign nationals is historically an area of scrutiny. The government focused a lot on getting tax revenue from foreign nationals, who have no representation in the congress. If you become part of this cohort, I recommend that you find a competent real estate attorney to structure the holdings for you before you renounce your citizenship or give up your green card.
Here is a resource on the pros and cons of ownership structure for NRA to hold US-based properties. Note that depending on what you want to accomplish and the size of your asset base, what’s best for billionaires with assets across the world may not be the best for you. There is not one solution that has no negative side, so it’s a matter of tradeoffs.
Lastly, as mentioned in the previous post, before you renounce citizenship or give up your green card, make sure you take the steps to avoid becoming a covered expatriate. You can read up on how to avoid being one, and the unfavorable treatment from the IRS if you do become one. Most of all, if you do become one, there is no way to ratify that situation, so before you make the appointment at the US embassy or consulate, make sure you’ve done proper US tax planning.
I'm Hui-chin Chen, a globetrotter & certified financial planner helping you manage your finances from afar and on the go.
What is income tax scheme for rental income for non resident alien? is it possible to deduct all related expenses?
Hi coco, rental income is considered effectively connected income so you are able to take deductions. See: https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci
My brother in law is previously a Mexican citizen but is now a US citizen. He owns rental property in the US and is moving back to Mexico to help his aging mother. Does he need to have a US address on file to keep his rental property?
Hello,
Hope all is well. I came across
Your article which I am relating to but I am still unclear about my situation and hoping you can provide some guidance. I am a US citizen with Australian PR status (wife is Australian). We are targeting to move to Sydney around September and we are in the process of listing and selling our primary residence here in the States. We live in co-op apartment in NY and the process to sell can take anywhere from 4-6 months, which means if we decide to move to Sydney in September, we will likely have to complete the transaction when we are already in Australia. In this scenario, if we sell our primary residence in the US AFTER we have already set foot in Australia with the intention of staying, are we still able to claim the capital gain exclusion from the US transaction? Looking forward to your reply. Thank you.
Hi Robin, not sure what you mean by having US address on file. His name is on the deed and is public record in the county where the property is located. There might be county or state requirement on what kind of info the out-of-state owner needs to keep with the state. You can call the department in the specific county and ask.
Hi Sunny, generally speaking, you can claim exclusion if you use the property as primary home at least two years out of the five years prior to its date of sale. It doesn’t matter where you are physically on the date of sale since you are liable to file and pay taxes as US tax resident as long as you remain a US citizen.
Hi Hui-Chin, I’m on an H1-B visa and planning to move out of US for good. I’m not sure what’s best to do with my house(bought in Oct 2017). I definitely don’t want managing the house to be a complicated affair. At the same time, the potential appreciation of the house is attractive. Also, not sure how easy or difficult is to sell the house from abroad. what would be the capital gain situation if selling the house a couple of years down the line. Thanks in advance for your reply
Hi Sanju, if you meet the sec 121 exclusion criteria, it’s likely you can still claim them a couple years after you leave. Depending on the gains at that point your exclusion may cover all the gain. However, if you are married and want to claim sec 121 for both spouses, both spouses need to file individually since nonresidents cannot file joint return. You will also need to consider FIRPTA withholding applies only to nonresidents. Selling house from abroad shouldn’t be that difficult as there are plenty of foreign investors of US real estate that do this from abroad. You just need to find the right real estate company that has experience in handling transactions involving nonresident real estate owners.
Due to the pandemic relocation could be a concern or difficult. Considering somewhere in latin America or one of the European countries. Income is $75,000 per year, tax free, and guaranteed. Credit score needed, money needed down on a property, dual citizenship, etc. Cost of living is the biggest factor, health care and good schools. Do have Tricare for Life along with Medicare. The family has Tricare Prime.
Thanks for the message Robert. Do you have a particular question?
If I sell one of my 2 U S homes (niether is rental property) and move as a Permanent Resident to Latin America while then buying a home there prior to relocating, will the gain on my sold U S home be federally taxable by the U S? Or will it be tax-free just as though I was moving to a different state in the U S? I will have lived in the sold U S home for 3 to 4 years.
Hi Bruce, as long as you meet the tests under sec 121, you can take the exclusion. It doesn’t matter which home you *think* is your primary home. If your gain is beyond exclusion amount, you pay taxes on the excess amount.
Hello, I plan on renting my primary residence to move overseas, but if I decide to sell my home then, do I still qualify for a tax exemption of $250,000 or not?
Thank you.
Hi Hui-Chin. Hope all is well. This was a very helpful article. I am considering investing in real estate but I am unclear as to what implications it might have if I decide to move overseas. I am hoping you can provide some guidance. I am currently on H1B visa (but considered a resident alien only for tax purposes). I plan to invest in real estate through REITs or possibly through a crowdfunding platform. In case I decide to permanently leave the US, what would be the implications?
Hi Shrea, it all depends on how the investment is structured. Overall you need to know whether you own a structured product like a fund, a partnership interest, a company stock, or a share of the underlying real property outright to determine your tax liability as a nonresident after you leave the US.
Hi James, as long as when you sell, you still meet the ownership and use test, you can take the section 121 exclusion. However if you take depreciation due to renting the home out, the section 121 exclusion doesn’t cover the depreciation recapture.
If I move overseas and keep my house in US vacant, will it be still considered as my primary residence; that means the time I stay overseas can be counted towards the use test in Section 121 exclusion?
If you do not rent out your home and claim to have established other tax homes, such as FEIE based establishing tax home overseas, I can see it being possible as long as you can substantiate the facts. Someone can reasonably be considered to keep primary home in the US and work on cruise ships for a year so it’s not out of the realm of possibility. However if you never have physical presence in your primary home for 2-3 years then I think it may be a bit of a stretch. Definitely check with the CPA filing your taxes.
Hello I have a fourplex and plan to go to Mexico to live for approximately 10 years. I will not be working and I will be returning back and forth during the 10 years but will rely on the rent income. How will that work with taxes?
Hello Hui-Chin,
We own two homes here in the US. One is our primary home and the other is a rental that we rent to our daughter at a rate that excludes any monetary profit to us. In other words, her monthly rent payment covers the mortgage, HOA and yearly taxes and nothing more. We are considering taking early retirement to the EU and my husband has been considering selling the rental at the current market rate of $400K but to me. Does it make more sense to sell our primary residence at the current market rate of $1M and avoid the capital gains or sell the rental? We won’t claim residency in the US once retired but it make sense to me to have the rental available as an option should we come for visits and such and since it is nearly paid off, we would, within a year be making a bit of extra income from the property. So confused!!!
Hi Hui-Chin. Thank you for your reply to my previous question. I have been contemplating investing in real estate through crowdfunding platforms like FundRise and FarmTogether (specifically for investing in farmland) for quite sometime now. However, I have not been able to pull the trigger because I am unsure if H1B visa holders are eligible to invest through those platforms. Can H1B visa holders invest through FundRise and FarmTogether? As a visa holder who might leave the US in future, is it better to invest in real estate A) through crowdfunding or B) through REITS? Would love to hear your thoughts on this.
Hi Alex, you’ll report it on the US tax return the same way as if you live in the US, unless you become a Mexico tax resident which may require you to pay tax on rental income outside of Mexico. If you need to pay tax in Mexico then you can take a foreign tax credit on the US tax return.
Hi Marianne, I think this fact pattern requires more info before anyone can answer whether it’s a good idea. Eventually it depends on what your objectives are with selling the properties and the alternatives. I recommend you work with a financial planner if you need more clarity.
Hi Shrea, as H1B is immigrant visa, it’s likely most US investment custodians opened to US taxpayers will allow you to open account. However most of these new platforms to reduce regulatory burden do not take non-US investors, so it’s likely you’ll need to close them if you don’t stay. You can confirm that in their SEC filing.