What do you need to know about offshore real estate ownership and any associated tax reporting requirements? Are you a U.S. taxpayer or U.S. resident who owns real estate outside of the United States? It may surprise you to learn that the U.S. and many individual states, including California and New York, tax all income worldwide. Therefore, taxpayers need to be aware of their reporting requirements to avoid excessive penalties, interest, fines, tax audits, and the risk of criminal exposure for tax evasion.
There are many ways you may hold title to the offshore real estate – you may hold it personally, or an LLC, foreign trust, foreign corporation, or other legal vehicle may hold it. If you own property, even in Canada or Mexico, you are required to understand the tax implications of offshore real estate ownership, disclose your interests and holdings, and provide detailed information to the IRS and your state of residence.
Look for a firm that integrates business, legal, tax and accounting services as they are uniquely positioned to advise you on your foreign trusts, offshore accounts, investments, and real property. An international tax attorney can help you come into compliance with IRS and state tax reporting requirements, ensuring that you have correctly completed and filed all required forms. You are not required to report ownership of foreign real estate on either the FinCEN Form 114 or FBAR, or the IRS Form 8938 if you hold real estate directly (in your name). However, the entity or method with which you hold offshore real estate ownership can trigger specific reporting requirements. Any income generated by the property must be reported to the IRS, as well as your state tax agency, when required.
It is essential to note all reporting requirements associated with any foreign bank or financial accounts related to offshore real estate ownership.
There are sophisticated and complicated rules relating to the valuation of your property, as well as any income generated by the real property and associated bank accounts. The IRS has developed mutual and reciprocal reporting relationships with international banks and foreign sovereign tax agencies over the past ten years (FATCA). These offshore agents are providing direct information to the IRS, including your ownership interest and transactional details. The IRS has developed sophisticated AI applications to comb through all data pouring into the agency from institutions around the world and tie specific information back to the associated U.S. taxpayer or entity.
If you hold any offshore real estate ownership through a foreign partnership, corporation, single-member entity, or trust, your ownership interest and any associated income or losses will be reported on specific tax forms associated with that entity. For example, if you are a U.S. taxpayer with 10% or more of the interest in a foreign corporate entity, or serve as a director or officer of that corporation, the IRS Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations, or IRS Form 8858 – Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). Activities within a foreign trust are reported on IRS Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or IRS Form 3520-a – Annual Information Return of Foreign Trust With a U.S. Owner.
The failure to accurately report these assets and any associated income exposes individuals to significant financial and criminal risks. There is a lot to know about your responsibilities as a U.S. taxpayer with offshore real estate ownership or an interest in a U.S. or foreign corporate entity or trust that holds an interest in foreign real estate. You will need sound advice and counsel from the perspectives of business and corporate entities, domestic and international tax reporting, as well as accounting services. Accounting outside of the United States is quite different from our country’s Generally Accepted Accounting Principles (GAAP), rules and standards. It is often necessary to restructure foreign transactional and reporting information in order to meet U.S. tax reporting requirements.
