Wealthy clients probably at least wonder about owning a home in a foreign country. They should know that overseas homes come with tax conditions resembling those of homes in the U.S.—with a few exceptions.

“Each country has different rules. Depending on how the foreign property is held, there may also be U.S. reporting requirements,” said Donna Cuiffo, a CPA, managing director, senior tax partner and CFO at Clarfeld Citizens Private Wealth in New York and Tarrytown, N.Y.

Some U.S. tax rules apply overseas. Mortgage interest paid on a foreign home, for instance, can be deducted in the U.S. like on a domestic home, Suzanne Shier, a wealth planning practice executive and chief tax strategist with Northern Trust Wealth Management, wrote in the white paper, “Accidentally Global: Tax Tips for International U.S. Families.”

The rule for both U.S. and foreign homes is that interest on up to $750,000 of mortgage principal is deductible if the debt was used to “acquire, construct or substantially improve” a primary residence or one other secondary residence.

A home owned under individual title and for personal use shouldn’t trigger U.S. income tax unless it’s sold for a gain, according to Shier. The foreign country and local municipality may impose a myriad of taxes.

“If you plan on renting the vacation home, [the deduction] depends on how long you plan to rent the property and how many days you plan to use it,” added Jason A. Hoffman, a CPA and senior manager at Janover LLC in New York. “You can deduct real property taxes of a home not in the U.S., but that is limited to the $10,000 state and local tax deduction, as well.

“You might be subjecting yourself to tax in that country if the second residence is used more than a certain amount of days," he said. "You also might have to ... open a bank account in that country and be subject to all the reporting and disclosure rules associated with having foreign-owned financial and non-financial assets.”

Renting the home changes the tax picture. “Often people feel that the income they receive from outside the U.S. is not subject to U.S. tax,” said Derek Holman, CFP, co-founder and managing director of EP Wealth Advisors in Torrance, Calif. “Not true. Most often having a rental property overseas results in more tax."

Said Cuiffo, “For a rental, capture the expenses that relate to the business, especially those which may be unique based on the location of the property.”

“One strategy is to turn it into a rental prior to sale if you want to buy another property that’s not in the U.S., and use Section 1031 to defer the capital gains tax,” Hoffman said.

“Keep in mind, if you plan to stay in the home for more than 14 days in the year, the U.S. will limit what expenses you can deduct against the income,” Holman added.

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