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This section offers resources for first-time Expats or Expats moving to a new location. It is also useful for member clubs which want to help their new Expat members. Read stories from Expats about their experiences in articles at the bottom of this page.

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7 Things Tax-Savvy Expats Learn Before Investing in US Property

With mortgage rates nearing an all-time low in the US, property investment has soared. Even for those who reside outside the US, investment opportunities abound. Whether it be a vacation property, second home or a rental property, your US real estate options are bountiful! But it is important to ensure you understand the possible tax implications, as well as how to deduct expenses to reduce your US tax liability. So let’s take a look at 7 things you need to know!

1. Maximize deductions 

If you are purchasing a home for personal use, you are afforded the same deductions as someone who resides in the US. The interest on the mortgage is deductible and you can write off 100% of the interest you pay on up to $1.1 million of debt.

As far as improvements or repairs, if your home is not a rental home, repairs are not deductible. But if you plan to do some home renovations or improvements, one way to save on the costs is to make the improvements to the property at the time it is purchased.

If the mortgage you take out to buy a home includes additional money to make renovations, your acquisition cost for the home includes this amount. You can then deduct the interest on this amount part of your mortgage interest deduction. If you don’t wrap the renovation costs into your mortgage (or take out a home equity loan), the costs are not deductible. 

2. Choose a Limited Liability Corporate Structure for Rental Properties

Many expats choose to buy US real estate primarily for rental properties. Even if you plan to spend some time in the home while visiting the US (or returning there from abroad), if it is rented out more than 15 days per year, it is classified as a rental property.

The advantage of purchasing the property under a Limited Liability Company (LLC) is that you are afforded a greater level of liability protection. If you buy the home as an individual and something serious happens to the renters (i.e. bodily injury or death), you are completely liable for any resulting damages. The LLC protects you from personal liability. 

In addition, an LLC is relatively easy to set up and because an LLC is considered disregarded for tax purposes, all rental activities/income are reported on your individual tax return. So choosing an LLC buys you greater protection yet doesn’t increase your US tax reporting requirements significantly.

3. You Can Deduct Repairs on Your Rental Property

Repairs are classified as work on your property that simply restores it to its original state. Repairs are different than improvements, which are considered to be those repairs that increase the value of a property and prolong its life. Repairs to your rental property are 100% deductible in the year that they were incurred.

4. Improvements are Not Deductible

So, repairs are deductible against rental income but improvements are not. However, that doesn’t mean improvements are completely out of pocket. Improvements are capitalized and depreciated over a 27.5 year period.

This example may explain repairs vs. improvements. Carl’s rental property has a very leaky roof. He pays $2,500 to have it fixed. This fix didn’t improve the property’s value—it simply restored it to its original state. This is considered a repair and is deductible against rental income. 

Now let’s say Carl’s roof suffered significant damage and had to be completely replaced. He spent $9,000 on his new roof, and this is considered an improvement because it is extending the life of the property.  

5. There Are Other Deductible Costs for Rental Properties!

a) Start-Up costs: As you get your rental property prepared and ready for its first occupants, you may incur some start-up costs. The IRS allows you to deduct up to $5,000 in start-up expenses for your first year of business. Any expenses over $5,000 are capitalized and deducted in equal installments over the following 15 years. Here are a few of those expenses that would be considered deductible start-up expenses:

  • Minor repairs required to prepare the property
  • Licenses, permits and registrations
  • Insurance premiums
  • Costs for maintenance prior to offering the property for rent
  • Professional fees associated with the establishment of business entities

b) Management Fees

If you choose to hire a management company to handle the day-to-day operations of your rental property, you can deduct any management fees from your tax return. 

c) Home Office Deduction

This is only deductible if you a portion of your home is used exclusively and regularly for the purposes of actively managing your rental property. Such things as rent (or mortgage interest), taxes, utilities, insurance and internet are allocated on a square footage basis and deducted from the rental income. 

d) Travel Expenses

Travel to the US for purposes of managing your rental property can get expensive! Fortunately, any expenses to manage the property can be deducted, so long as they are 100% attributed to the property management. Any side trips to visit friends and family are not deductible so it is important to clearly document your hotel stays, food, airfare, etc. If the IRS asks for proof that you traveled only to manage your property and you have no hotel or restaurant receipts because you stayed with family, they will not approve those deductions because they are deemed ‘personal’. 

Expenses to travel to the US to purchase a property are different than management costs and would be capitalized with the property price and depreciated over 27.5 years.  

6. You Will Likely Pay Capital Gains Tax When You Sell

If the sell the home you purchase, you can exclude up to $250,000 of your capital gains from tax (or $500,000 if you're married, filing jointly). However, you must have owned and lived in the home as your primary residence for at least 2 of the last 5 years before the sale to exclude that from capital gains. Since you likely are not living there primarily if you are reading this article, prepare to pay capital gains tax. 

Assuming you hold the property for more than one year, you will be taxed the long-term capital gains tax. Those rates vary based on your tax bracket and range from 0% to 20%. Those who will pay the 0% rate include individuals in the 10% and 15% federal income tax brackets. The vast majority of Americans will pay the 15% rate, as that applies to those in the most common 25% federal income tax bracket. The highest rate of 20% is only applied to the highest-income earners who are in the 39.6% federal tax bracket. There is also a possibility you could be hit with the 25% capital gains tax, but how that is determined is a bit more complicated. We suggest you contact a tax professional to fully understand how your investment will be taxed. 

7. Avoid Capital Gains with a Like-Kind Exchange

To avoid capital gains on your property, you can simply purchase another similar property—this is called a like-kind exchange. When you do this, you are required to find another piece of suitable real estate within 45 days after the sale of the first property. Then you must commit to buying this property in writing through a disinterested third party—in essence this party acts as an intermediary. (Note that the party can’t be your real estate agent, your accountant, your attorney, etc).  Then you need to close on the new property within 180 days.  

Sounds great, right? Well, there is one caveat. You cannot sell a US property and buy a foreign property and consider this a like-kind exchange. The US doesn’t see that as a similar purchase and therefore will charge you capital gains tax. So you would need to purchase a similar property in the US to avoid capital gains altogether.

We have a host of information on our site for US property investors, including a free downloadable guide for US property investors so please feel free to visit our site!

This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and IRS Enrolled Agents who have extensive experience in the field of expat tax preparation. If you’d like to speak to a Greenback accountant about buying or selling a US property, simply click here to get started. For more information about Greenback Expat Tax Services or filing US expat taxes, please contact us.

US expats are often concerned about the dreaded dual-taxation when filing US taxes. But thankfully, the US has put into place several deductions and exclusions to help reduce that possibility. So we have outlined the top 3 ways to save on your US expat taxes!

1. The Foreign Earned Income Exclusion (FEIE)
This is the most common way US expats reduce (or even eliminate) their US tax liability. The FEIE allows you to exclude the first $99,200 of foreign earned income from US taxation (and $100,800 in 2015). This exclusion isn’t automatic—you need to both qualify for and elect it using Form 2555 or 2555-EZ.

To be eligible for the FEIE, you must pass one of two residency tests: The Physical Presence test (PPT) or the Bona Fide Residence test (BFR). 

Under the PPT, you must be physically present inside a foreign country for 330 of any 365-day period. This means FULL days, so any time you spend traveling to and from the US cannot be included in the 330 days. It’s important to track your time carefully, as just spending one day too many in the US can cost you thousands! 

2. The Foreign Tax Credit (FTC)

There are a couple of excellent reasons to use the Foreign Tax Credit. 

The FTC doesn’t require you to have foreign earned income (just foreign income) and you do not need to qualify to use it. So if you do not qualify as a US expat and you pay taxes on foreign income, you can use the FTC as a dollar-for-dollar credit on that taxes you paid to a foreign country.

In addition, those residing in high tax countries (such as the UK) may actually find that using that using the FTC can save them MORE than using the FEIE! Why? Because you may pay more in foreign taxes than you would owe in US taxes, which leaves you with extra foreign credits. You can use those extra credits to offset future taxes (for up to 10 years) or you can ‘carry back’ the credits and amend last year’s return to potentially receive a refund from the IRS. 

Finally, those who qualify for the FEIE could use the FTC in conjunction with the FEIE if income exceeds the $99,200 threshold. In this instance, you may be able to offset the US taxes on the amount of un-excluded income. 

For example, if you earn $140,000 (USD), you could exclude $99,200, which leaves you with $40,800 of taxable income in the US. So, the foreign tax you pay on that remaining balance can be offset with the Foreign Tax Credit. If the US tax on the $40,800 of income is less than the foreign taxes you paid, you have no US tax liability.  

3. Foreign Housing Exclusion
Higher living expenses are sometimes a consequence of living abroad. As such, the US created the Foreign Housing Exclusion, which allows you to exclude certain housing expenses from US taxation. The Foreign Housing Exclusion applies only to amounts considered paid for with employer-provided amounts.  Employer-provided amounts include any money paid to you or paid on your behalf by your employer that are taxable foreign earned income to you for the year. This would include wages, salary, reimbursement for housing expenses or payments by your employer as part of a tax equalization plan.

Examples of qualifying housing expenses include:

  • Rent
  • Repairs
  • Utilities (excluding telephone bills and cable TV)
  • Personal property insurance
  • Leasing fees
  • Furniture rental
  • Parking

  • How to Calculate

    The maximum deductible Foreign Housing Exclusion amount varies each year because it is tied to the Foreign Earned Income Exclusion (which adjusts each year for inflation). Here is the basic calculation:

    Housing expense limitation – Base Housing Cost = Maximum Housing Exclusion

    The Base Housing Cost is the IRS’ calculation of what it would cost if you were living in the US, so there is a housing limitation which must be reduced by the base in order to determine what you can exclude.

    For 2014, here are the actual numbers:

    $29,760 ($99,200 x 30%) – $15,872 ($99,200 x 16%) = $13,888

    So the maximum you can exclude in 2014 is $13,888. However, the IRS publishes an annual list of cities who have a higher housing expense limitation due to an even higher cost of living, so you may want to review that list to determine the exclusion for your city of residence.

    Final note: You must qualify for the Foreign Earned Income Exclusion to use the Foreign Housing Exclusion and it must also be elected on Form 2555. 

    This is not a comprehensive list of ways to save on your US taxes—just the most commonly used ones. While US taxation can be confusing, it doesn’t have to be a financial burden!

    Greenback specializes in the expert preparation of US expat tax returns for Americans living around the world. If you’d like Greenback to prepare your US expat tax return, simply click here to get started or visit www.greenbacktaxservices.com for more information.

    Millions of American expats are behind on their US expat taxes and Greenback Expat Tax Services is here to help! In our new webinar Getting Caught Up on US Expat Taxes we will outline how expats can become compliant without incurring harsh penalties.

    Please join us on Wednesday, November 5, 2014 at 8am ET.

    In this FREE, interactive webinar we will outline the US filing requirements (including FBAR and FATCA) and provide all the information you need to get caught up on delinquent US tax returns. 

    Greenback Co-Founder David McKeegan will answer all your questions, including:

    · What exactly am I supposed to file?

    · Do I need to file FBAR (Foreign Bank Account Report)

    · What are the IRS amnesty programs?

    · Will I have to pay large penalties?

    · What is FATCA and do I need to file Form 8938?

    · What happens if I don ’t get caught up?

    · And more! 

    US tax compliancy has moved into the spotlight recently and deciphering fact from fiction isn’t always easy! So join our expat tax experts for an accurate, thorough discussion about how you can become (and stay!) compliant. We encourage you to ask questions throughout the webinar—it’s interactive for a reason!

    Simply register here and feel free to share this link: http://greenback.enterthemeeting.com/m/ZTX7VJZQ

    Our friends at Greenback want to know what YOU think!

    Don't miss this opportunity to let your voice be heard! Greenback Expat Tax Services, in cooperation with American Citizens Abroad Global Foundation (ACAGF), is reaching out to the millions of US expats around the world, asking that burning question: What do YOU think about filing American expat taxes as a US citizen living abroad?

    Complete the brief survey right here and Greenback will reward your participation with $25 off your 2014 Federal Tax Return preparation! Simply take the survey and register with Greenback between March 2, 2015 and April 20, 2015 and complete your tax return by May 20, 2015—the $25 discount will be automatically applied to your final invoice. You can find more details on how to take advantage of this special offer at the end of the survey.

    The 2014 US Expat Opinion Survey is the perfect opportunity to speak your mind about US expat taxes—it's where your opinion really matters. Thank you for being a part of this year's survey!

    *ACAGF is nonpartisan and non-commercial. It does not provide legal, accounting or return preparationservices, nor does not promote the interests of one or more providers of such services.

    If you are behind on your US expat taxes, there is no better time to get caught up!  With the recent IRS changes to the Streamlined Filing Procedures, you can become compliant without late filing or FBAR penalties. And now you can save $100 off the cost of getting caught up with the tax professionals at Greenback!

    Simply complete this short quiz below by September 4th, 2014 and register by October 17, 2014. Don’t forget to provide your name and email address at the end of the quiz so your discount can be automatically applied to your total invoice!

    You can take the quiz right here: http://www.greenbacktaxservices.com/late-filer-quiz/

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