Have you ever wanted to move to another country? Perhaps to a tropical destination, or some other country with a high standard of living. Regardless, there are tons of reasons for wanting to buy a foreign property. It really depends on each person’s unique situation. Whether you are purchasing a property in your home country so you can visit more often, or maybe you’re trying to establish yourself in a new country altogether. Like we said, there are lots of reasons for wanting to do and it’s not a decision that is taken lightly. But don’t worry, we’re here to help. Without further ado, here’s what you should know as an American expat when it comes to buying foreign property.
How taxes work with US and foreign governments.
When it comes to purchasing a property in a foreign country, you must still keep the US government in mind. Although you may be living elsewhere, you are still an American citizen. And you know what this means, right? Well it means you are going to be taxed not only in your country of residence, but also in the US too. And this US taxation accounts for your foreign assets and income. Surely this is something you want to keep in mind when it comes to buying a foreign property.
Buying a foreign property as your primary residence.
For the sake of this discussion, we’ll assume that you are looking to purchase a primary residence overseas. This means it is the place you will be spending the majority of your time. Now, you may own a US property, but again, your foreign home will be your primary one in this case. So let’s get into it.
When buying a foreign property as your primary residence, you are entitled to the same tax-benefits as a US homeowner. Keep in mind, this strictly refers to the US side of your taxes. It is a separate story when dealing with the relevant foreign government. As such, you are allowed to deduct expenses from your taxable income like interest payments (for mortgages), property taxes and more. Though we should mention that this requires that you actually have taxable income to deduct it from. This is especially relevant as some foreign income is excluded from all taxable income. So unless you have US-based income, or some other foreign income that is considered taxable, then this may not apply to you.
Selling a foreign property as your primary residence.
When it comes to selling a foreign property as your primary residence, you are eligible for the same US tax treatment as with US properties. Typically this refers to capital gains or losses on the property. And as we know, capital gains receive preferential treatment in the US tax system. But it can get much better than just a reduced tax rate. Specifically, if the property was your principal residence for two of the five years before you decide to sell, then the first $250,000 in capital gains is tax-free from the US. Keep in mind though that this is just from the US government’s perspective. You may still have to declare these gains on your foreign tax forms.
Remember, this is only one side of the story.
Despite all of these tax advantages that you are eligible for in the US, you cannot forget about the tax system in your country of residence. No matter how much savings you are exposed to in the US tax system, you may not receive such preferential treatment across borders.
Don’t forget about currency fluctuations either.
It’s also very important that you keep an eye on the currency exchange rate between the US and your country of residence. Specifically, it can have a profound impact on any capital gains or losses realized on your property. Also, it can affect the true costs of any mortgages used to finance the original purchase of the property. The bottom line is that there is lots to consider when it comes to buying and selling a foreign primary residence.
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