I am a U.S. citizen and own rental real estate in a foreign country. Am I required to report my rental income on my U.S. tax return?

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Yes.  Most countries tax their citizens based on where those citizens reside.  However, U.S. citizens are required to report their worldwide income.  Therefore, if you are a U.S. citizen who owns income producing property in a foreign jurisdiction, you must report that income on your U.S. tax return.  To the extent you have rental expenses that are allowable under the Internal Revenue Code, such as maintenance and utilities, you may claim those expenses as well. In addition, U.S. taxpayers are generally allowed a credit for income tax paid to foreign jurisdictions.

There are other reporting requirements that may be relevant to your foreign real estate.  If your rental real estate is held in a foreign trust, you may need to file a Form 3520-A (Annual Information Return of Foreign Trust).  Moreover, if you opened a foreign bank account to receive your rental payments and the aggregate balance in your foreign financial accounts exceeded $10,000 at any time during the year, then you are required to report all foreign financial accounts on a FinCEN Form 114 (Report of Foreign Bank and Financial Accounts (FBAR)) that must be electronically filed on or before June 30 of the year following the calendar year at issue.  Failure to file these forms can also lead to hefty civil and criminal penalties.

Many U.S. citizens have reported and paid taxes on their rental income to the foreign jurisdiction in which the property is located and are astonished to discover that the same rental income must also be reported on their U.S. returns.  Other taxpayers have simply ignored their U.S. reporting requirements, exposing themselves to substantial civil penalties and criminal prosecution.  Fortunately, the IRS has implemented disclosure programs and filing procedures to help taxpayers clean up past noncompliance and reduce potential penalties.  If you own foreign income producing property and/or foreign entities and would like to learn more about your reporting requirements and disclosure options, you should contact a tax professional.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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