Foreign Rental Income Tax Guide for US Expats 2026: Schedule E, FTC & FBAR Requirements

KEY INSIGHT

US citizens and permanent residents must report all foreign rental income on their US tax return — worldwide income reporting applies regardless of where the property is located. Foreign rental property is reported on Schedule E, the same form as US rental property. Key differences from US rentals: depreciation must be calculated using the 40-year Alternative Depreciation System (ADS) for foreign residential real property (not the standard 27.5-year MACRS). Taxes paid to the foreign country generate a foreign tax credit (Form 1116). The 3.8% Net Investment Income Tax applies to net foreign rental income above the threshold. FBAR filing is required if rental proceeds pass through a foreign bank account exceeding $10,000.

At a glance

Key Facts

Reporting Foreign Rental Income: Schedule E

All foreign rental income is reported on Schedule E (Supplemental Income and Loss), Part I — the same section used for US rental properties. The reporting is identical in structure: gross rents received, minus allowable expenses (property management fees, mortgage interest, insurance, repairs, utilities paid by landlord, local property taxes), equals net rental income or loss. Currency conversion: all amounts must be converted to US dollars. Use the average exchange rate for the year (IRS publishes annual average rates; also acceptable: the exchange rate on the date of each payment). Keep records of exchange rates used. Net foreign rental income flows to Form 1040, Schedule 1. If a net rental loss, passive activity loss rules apply — the $25,000 special allowance and material participation rules are the same as for US properties. Foreign property taxes paid are also deductible as an itemized deduction on Schedule A (subject to the $10,000 SALT deduction cap, if applicable).

40-Year ADS Depreciation: The Foreign Property Rule

Foreign residential rental property must be depreciated using the Alternative Depreciation System (ADS) — a 40-year straight-line method. This contrasts with US residential rental property, which is depreciated over 27.5 years using MACRS. Example: US rental property worth $300,000 → annual depreciation ~$10,909/year. Same property in France → annual depreciation $300,000 / 40 = $7,500/year. The 40-year rule significantly reduces the annual depreciation deduction compared to US properties — a real tax cost of owning foreign vs domestic rental property. Foreign commercial property: also 40-year ADS (vs 39 years for US commercial under MACRS — less different). Land value: not depreciable, same as US rules. Depreciation recapture on sale: Section 1250 unrecaptured gain (taxed at max 25%) applies to accumulated depreciation when the foreign property is sold.

Foreign Tax Credit on Rental Income

If you pay income tax on rental income in the foreign country where the property is located, you can claim a US Foreign Tax Credit (FTC) on Form 1116 to offset the US tax on the same income. The FTC goes in the 'passive income' limitation basket (same as dividends and royalties). You cannot use the FTC to offset US tax below zero — excess credits carry forward one year back and 10 years forward. Important interaction with FEIE: if you elect the Foreign Earned Income Exclusion, it only applies to earned income from employment/self-employment — foreign rental income is always separate. The FEIE and FTC can coexist: exclude earned wages under FEIE; separately claim FTC for taxes on rental income. Do not exclude rental income under FEIE — rental income is passive, not earned income. If your foreign country taxes rental income at a rate similar to or higher than US rates, the FTC typically eliminates most or all of the US tax on that income.

FBAR and FATCA: Information Reporting Requirements

Owning foreign rental property can trigger multiple information reporting requirements. FBAR (FinCEN Form 114): required if you have foreign bank accounts (including accounts where rental proceeds are deposited) with aggregate balances exceeding $10,000 at any time during the year. The foreign property itself is NOT reported on FBAR (real property is excluded). But rental income deposited in a foreign bank account is — the account is reportable. FATCA (Form 8938): required if your total foreign financial assets exceed $200,000 (single, living abroad) or $50,000 (single, living in US) at year-end. Foreign real property held directly (in your own name) is NOT a 'foreign financial asset' for Form 8938 purposes. However, if you hold the property through a foreign corporation, foreign LLC, or foreign trust, those entity interests ARE reportable on Form 8938 (and may require additional forms: Form 5471, 8865, 3520). Direct ownership of foreign real estate → no Form 8938; held through a foreign entity → Form 8938 and more.

Net Investment Income Tax and Passive Activity Rules

Net Investment Income Tax (NIIT): the 3.8% NIIT applies to net investment income for taxpayers with MAGI above $200,000 (single) / $250,000 (MFJ). Net foreign rental income is investment income — it is subject to NIIT on top of regular income tax. Unlike the FEIE (which excludes foreign earned income from US tax), there is no NIIT exclusion for foreign rental income. Passive activity loss (PAL) rules: the same §469 rules that apply to US rentals apply to foreign rentals. You must actively participate to use the $25,000 special allowance (active participation is harder to demonstrate for a property you don't live near). If your AGI exceeds $150,000, the $25,000 allowance is completely phased out. Suspended PALs on foreign rentals accumulate and are released when you sell the property. Real estate professional status (750+ hours in real property trades) can make foreign rental income non-passive — though demonstrating material participation in a foreign property is more difficult.

Introduction

US expats owning rental properties abroad face the full complexity of US worldwide taxation — they must report foreign rental income on their US return while also potentially owing tax in the country where the property is located. The foreign tax credit generally prevents true double taxation, but the mechanics require careful calculation. US expats who previously excluded foreign earned income under the FEIE must understand that rental income is not 'earned income' — the FEIE does not apply to rental income, even if the property is in a country where the expat works. This guide covers the specific rules for foreign rental property that differ from the standard US rental property rules.

Section 01

Selling a Foreign Rental Property: Tax Considerations

Selling a foreign rental property triggers several US tax issues:

Capital gains: Gain on the sale of foreign rental property is treated as US capital gain — long-term (held 1+ year) at 0/15/20% rates depending on your income. Plus 3.8% NIIT if above threshold.

Section 1250 depreciation recapture: The accumulated depreciation you claimed (using 40-year ADS) is 'unrecaptured' on sale — taxed at a maximum rate of 25% regardless of your regular capital gains rate.

Currency gain: If you took out a foreign currency mortgage to buy the property, the repayment of that mortgage may generate a separate currency gain or loss (Section 988) that is ordinary income, not capital gain.

Foreign tax on the sale: If the foreign country taxes the gain, claim the FTC to offset the US tax. The capital gain goes in the general limitation basket for FTC purposes (not the passive basket), which is a separate calculation.

Passive loss release: All suspended PALs from prior years are released in the year of sale and can offset any income.

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FAQ

Frequently Asked Questions

I live in France and rent out a property there — do I use FEIE or the Foreign Tax Credit for the rental income?

Neither directly. The Foreign Earned Income Exclusion (FEIE) applies only to earned income — wages and self-employment income from work. Rental income is passive income, not earned income, and cannot be excluded under the FEIE. For foreign rental income, you must report the gross rent on Schedule E, deduct eligible expenses, and pay US tax on the net income. You then claim a Foreign Tax Credit (Form 1116) for the French income tax you paid on the same rental income. If France taxes your rental income at a rate close to or higher than the US rate, the FTC will largely or fully eliminate the US tax. You can still use the FEIE for your French employment wages separately — the two mechanisms operate independently. This is a common misunderstanding: FEIE for wages + FTC for rental income is the correct approach for US expats with both types of income.

Do I have to report the foreign property itself anywhere on my US tax return?

The income from the foreign property is reported on Schedule E. The property itself does not have a separate reporting form if you hold it directly in your name. However: if you hold the foreign property through a foreign corporation, you likely need to file Form 5471 (information return for controlled foreign corporations); through a foreign partnership → Form 8865; through a foreign trust → Form 3520/3520-A. If you have a foreign bank account with rental proceeds over $10,000, file FinCEN Form 114 (FBAR). The property value is not reported on Form 8938 if held directly — only foreign financial assets (accounts, securities, interests in foreign entities) are reportable there. Real property held in your own name is the simplest ownership structure from a reporting standpoint.

Can I deduct a mortgage on my foreign rental property?

Yes — mortgage interest on a foreign rental property is deductible as a rental expense on Schedule E, reducing your net rental income. This is true whether the mortgage is held with a US bank or a foreign bank. If the mortgage is denominated in foreign currency, convert interest paid to US dollars at the average annual exchange rate (or rate on date of payment). A foreign currency mortgage also creates potential Section 988 currency gain/loss exposure on principal repayments — a complex area requiring specialist advice. Note: the mortgage interest deduction here is on Schedule E as a business expense, separate from the Schedule A itemized deduction for home mortgage interest. If the foreign property is also your personal residence for part of the year, you must allocate expenses between rental and personal use — only the rental portion is deductible on Schedule E.

Disclaimer:This guide provides general tax information for educational purposes only. Foreign rental income taxation involves US tax law, foreign country tax law, applicable tax treaties, and information reporting rules — all of which interact in complex ways. Nothing in this guide constitutes tax or legal advice. Consult a CPA or tax attorney experienced in US expat and international real estate taxation.

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