Every few weeks someone tells me, with complete confidence, that their apartment in Zagreb or their rental flat in Lisbon has nothing to do with the IRS. They are half right, and the half they are wrong about is expensive. The property itself usually goes unreported. Almost everything around it, the rent, the bank account, the holding entity, the inheritance, the sale, is reportable, and the penalties for missing those filings start at $10,000 and go up from there.
The Property Itself Is Usually Invisible to the IRS
Start with the part people get right. There is no U.S. form that says "I own a house in another country." Foreign real estate held directly, in your own name, is not a specified foreign financial asset under the Form 8938 (FATCA) rules, and it is not a foreign financial account for FBAR purposes. A U.S. citizen who buys a vacation home in Croatia with a wire from a U.S. bank, holds title personally, and never rents it out may genuinely have nothing extra to file.
That is the entire safe harbor, and it is narrow. Change any single fact and reporting starts:
- Rent it out, even casually, and the income belongs on your U.S. return.
- Open a local bank account to collect rent or pay the property manager, and FBAR and Form 8938 come into play.
- Hold it through a foreign entity, which many countries push foreign buyers into, and you may owe Form 5471 or Form 8865 every year.
- Inherit it or receive it as a gift from a nonresident, and Form 3520 may be required.
- Sell it, and both the gain and the currency movement on your mortgage become U.S. tax events.
The rest of this post walks through each trigger, because in practice a single foreign property usually pulls two or three of them at once. For the broader landscape, see my international tax services overview.
Foreign Rental Income Goes on Schedule E, in U.S. Dollars
U.S. citizens and residents are taxed on worldwide income under Section 61. Rent from a foreign property is reported on Schedule E exactly like rent from a property in Des Plaines. It does not matter that the country where the property sits also taxes the rent, that the tenant pays in euros, or that the money never touches the United States.
Three mechanics separate a correct foreign Schedule E from a wrong one:
- Currency translation. Income and operating expenses are translated at the average exchange rate for the year. The purchase price, capital improvements, and sale proceeds use the spot rate on the date of each transaction. Mixing these up quietly distorts both your annual income and your eventual gain.
- Depreciation runs on a different clock. Property used predominantly outside the United States must be depreciated under the alternative depreciation system of Section 168(g). For foreign residential rental property placed in service after 2017, that means 30-year straight line, not the 27.5 years you would use domestically. Placed in service before 2018, it is 40 years, and foreign nonresidential property is 40 years as well. No bonus depreciation. I see returns prepared on the domestic schedule constantly, and every year of it is an incorrect return.
- The foreign tax is a credit, not a wash. If the local jurisdiction taxes the rent, you generally claim a foreign tax credit on Form 1116 in the passive category. The credit is limited to the U.S. tax on that same income, so a high foreign rate does not refund the difference, and a country with no income tax on rent leaves you paying the full U.S. rate.
If you live abroad and the property is in your country of residence, the same rules apply, layered on top of your expat filing obligations. The foreign earned income exclusion does not help here: rental income is not earned income.
The Rent Has to Land Somewhere: FBAR and Form 8938
Here is where unreported foreign property most often turns into a penalty case. The property is invisible; the bank account that services it is not.
If you open a foreign account to collect rent, pay the mortgage, or hold a security deposit, and the aggregate value of all your foreign accounts exceeds $10,000 at any point in the year, you must file the FBAR (FinCEN Form 114). Form 8938 attaches to your return on top of that once your specified foreign assets cross the thresholds: for a single filer living in the United States, $50,000 at year end or $75,000 at any time, with higher thresholds for joint filers and for Americans living abroad.
Two things to know about the penalty exposure. First, after the Supreme Court's decision in Bittner, the non-willful FBAR penalty applies per late report, not per account, which capped the worst-case math for people with many small accounts. Second, that is still $16,536 per late report (the 2025 inflation-adjusted figure, up from the $10,000 statutory amount) for a form that takes twenty minutes to file, and the willful penalty, which the IRS can build on recklessness alone, is the greater of $165,353 (the inflation-adjusted $100,000 statutory amount) or half the account balance. A rental flat that nets $6,000 a year is a bad reason to carry that risk.
Owning Through an Entity Changes Everything
Plenty of countries make it difficult or impossible for foreigners to hold real estate directly, so buyers end up with a local company, a partnership, or a statutory trust arrangement. Each one has its own U.S. filing:
- Foreign corporation. Own 10% or more and you are likely in Form 5471 territory, with the filing category depending on your ownership level and whether the company is a controlled foreign corporation. If the company rents the property out, the rental income can be taxed to you currently under the anti-deferral rules, including GILTI, reworked as net CFC tested income under the OBBB international tax changes. And a personal-use home sitting inside your own foreign corporation creates its own problems, because rent-free use of corporate property is an economic benefit the IRS can treat as a distribution.
- Funding the purchase. Wiring more than $100,000 in a 12-month period to your foreign corporation to buy the property is itself reportable on Form 926. The penalty for skipping it is 10% of the transfer, capped at $100,000 unless the failure was intentional.
- Foreign partnership. Buy with partners through a foreign partnership and Form 8865 enters the picture, with categories and penalties that mirror Form 5471.
- Mexican fideicomiso. The bank trust that foreigners must use for residential property in Mexico's restricted zones looks like a foreign trust, and for years preparers filed Forms 3520 and 3520-A for them. Under Rev. Rul. 2013-14, a standard fideicomiso where you keep full control and the bank holds bare legal title is generally not a trust for U.S. tax purposes, so those filings are usually unnecessary. The property is treated as owned directly, which puts you back in the ordinary rules above.
One more asymmetry worth naming: while directly held foreign real estate stays off Form 8938, your interest in the foreign entity that holds the real estate is a specified foreign financial asset. Wrapping the property in a company does not reduce your reporting. It multiplies it.
Inherited or Gifted Foreign Property: Form 3520
A U.S. person who receives more than $100,000 in a year from a nonresident alien individual or a foreign estate must report it on Form 3520, Part IV. That is a reporting threshold, not a tax: the inheritance itself is generally not taxable income, and inherited property typically takes a basis equal to its fair market value at death. Real estate counts toward the $100,000 at fair market value, so inheriting your parents' apartment in Sarajevo or a share of farmland in Punjab almost always crosses the line.
The penalty for a missed Form 3520 is 5% of the unreported amount per month, capped at 25%. On a $400,000 property, that is up to $100,000 for skipping an information form on a nontaxable inheritance. The IRS assessed these penalties automatically for years, and while it announced in 2024 that it would stop auto-assessing on late-filed returns reporting foreign gifts and review reasonable cause statements first, that relief only helps if you actually file. I covered the form in depth in my Form 3520 and foreign inheritance guide.
Once the property is yours, everything above applies going forward: Schedule E if you rent it, FBAR for the account you open to manage it, and the sale rules below when you dispose of it.
Selling Foreign Property: Where the Currency Traps Live
The sale is where I find the most money left on the table, and the most phantom income people never saw coming.
- Your gain is measured in dollars, not local currency. Basis is what you paid translated at the exchange rate on the purchase date. Proceeds are translated at the rate on the sale date. If the local currency strengthened against the dollar while you owned the property, you can have a large U.S. taxable gain on a property that barely moved in local terms. It works in reverse too: a property that gained locally can produce a smaller dollar gain, or a loss.
- The principal residence exclusion travels with you. Section 121 does not care where the home is. If you owned and used the foreign property as your main home for two of the last five years, up to $250,000 of gain ($500,000 married filing jointly) is excluded. Note that depreciation claimed during any rental period is recaptured and is not covered by the exclusion.
- Paying off a foreign mortgage is its own taxable event. This is the one nobody believes until they see it. Under Section 988, repaying a foreign-currency mortgage when the foreign currency has weakened against the dollar produces exchange gain, taxable as ordinary income, because you are settling the debt with cheaper currency than you borrowed. If the currency moved against you, the loss on a personal residence mortgage is nondeductible. Gain is taxable, loss is denied. It is asymmetric and it is the law.
- No like-kind exchange escape. Section 1031(h) says U.S. real property and foreign real property are not like-kind, so you cannot defer the gain by rolling a foreign sale into a U.S. purchase. Foreign-for-foreign exchanges of investment property can still qualify.
- Foreign tax on the sale is creditable, within limits. Many countries tax the gain at source. Form 1116 can absorb it, but limitation math and treaty resourcing sometimes decide whether you actually get the full credit. This deserves a projection before you sign, not after.
The Reverse Case: Foreign Owners of U.S. Real Estate
This post is about Americans owning property abroad, but the mirror image deserves one paragraph, because I see it weekly. A nonresident who owns U.S. rental property through a single-member LLC has an annual Form 5472 filing with a pro forma 1120, at $25,000 per missed year, plus FIRPTA withholding of 15% of gross proceeds when the property sells. If that is your situation, the exposure clock is already running.
Missed Some of This? Fix It Before the IRS Finds It
Most foreign property compliance problems I clean up were built innocently: a preparer who never asked about foreign assets, an owner who assumed the property manager's local filings covered everything. The good news is that the fix is well mapped. Non-willful taxpayers can generally use the Streamlined Filing Compliance Procedures to file three years of amended returns and six years of FBARs with a 5% penalty (or no penalty at all for qualifying taxpayers living abroad). Missed international information returns like Forms 5471, 926, and 3520 can ride along with a reasonable cause statement, and standalone delinquent filings have their own submission path.
What does not work is waiting. Foreign banks report U.S. account holders under FATCA, land registries are increasingly searchable, and once the IRS writes first, the streamlined door closes.
When to Get Help
Foreign real estate sits at the intersection of nearly everything I do: rental sourcing and ADS depreciation, FBAR and Form 8938, entity classification and Form 5471, Form 3520 inheritances, and Section 988 currency math at sale. If you own property abroad, are about to inherit some, or are planning a sale, the right time for a review is before the transaction, when elections and structuring are still on the table. If years of filings were missed, the right time is before the IRS finds the account that collects the rent.