Foreign Rental Income: US Tax Guide for Expat Landlords

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You collect €800 a month from tenants in your Lisbon apartment, pay Portuguese income tax on it, and assume your US filing obligation ends there. It does not. The IRS taxes US citizens on worldwide income regardless of where they live, and foreign rental income carries its own set of rules — slower depreciation, two different exchange rates depending on which form you're filling out, a 3.8% surtax that applies even if you've already paid the foreign country, and passive activity loss limits that trap deductions you thought you could use.

This guide covers everything a US expat needs to report foreign rental income correctly: Schedule E mechanics, the depreciation trap, the foreign tax credit on passive income, NIIT, and the filing checklist. If you're still deciding whether to buy, see the US tax guide to buying rental property abroad first. For the full story on what happens when you eventually sell, the phantom gains on foreign property sales guide covers the exit.

Foreign Rental Income Goes on Schedule E

Rental income from a foreign property is reported on Schedule E (Form 1040), Part I — the same form used for domestic rentals. You list each foreign property separately with its address, type (residential or commercial), and the number of days it was rented versus personally used during the year.

The mechanics are identical to a US rental in most respects: report gross rental income, deduct allowable expenses, and pay tax on the net. The differences come in the depreciation method you're required to use, the exchange rate rules, and the additional forms that attach to your 1040.

What You Can Deduct

Deductible expenses for a foreign rental property follow the same general IRS rules as domestic rentals. Ordinary and necessary expenses related to renting the property are deductible, including:

• Property management fees paid to a local manager or management company
• Mortgage interest (on a foreign mortgage for the rental property)
• Foreign property taxes paid on the rental
• Repairs and maintenance (not improvements — those get capitalized)
• Insurance premiums covering the rental property
• Utilities and common charges paid by the landlord
• Advertising and tenant-finding costs
• Travel to inspect or maintain the property (subject to documentation and ordinary-business rules)
• Professional fees for local accountants, attorneys, and translators
• Depreciation (see below — this is where foreign rentals diverge significantly)

Capital improvements — replacing a roof, adding an extension, major renovations — are not deductible in the year incurred. They increase your basis in the property and are recovered through depreciation over the property's life.

The Depreciation Trap: 30 Years, Not 27.5

This is the biggest tax-cost difference between a US rental and a foreign one. Domestic residential rental properties are depreciated over 27.5 years under the General Depreciation System (GDS). Foreign residential rental properties are required to use the Alternative Depreciation System (ADS), which extends the recovery period to 30 years for properties placed in service on or after January 1, 2018. Properties placed in service before December 31, 2017 use a 40-year ADS period.

You cannot elect out of ADS for foreign property — it is mandatory under IRC Section 168(g)(1)(A) for tangible property used predominantly outside the United States. Bonus depreciation, Section 179 expensing, and accelerated GDS methods are all unavailable for foreign rentals.

To claim depreciation, you must file Form 4562 alongside Schedule E. You report the property's cost basis, the date placed in service, the applicable method and recovery period (Straight-line / ADS / 30-year), and the current-year deduction. Form 4562 carries forward automatically in tax software, but if you switch preparers or software, verify that the depreciation schedule transferred correctly.

Two Different Exchange Rates

This catches expats every year. The IRS and FinCEN use different exchange rates, and using the wrong one for the wrong form is a common error.

Form	Exchange Rate To Use	Source
Schedule E (rental income and expenses)	IRS yearly average exchange rate for the tax year	IRS.gov — Yearly Average Currency Exchange Rates
FBAR (FinCEN Form 114 — peak account balance)	Treasury Reporting Rate of Exchange as of December 31	US Treasury FMS fiscal data portal
Form 8938 (FATCA — asset values)	Treasury rate on the last day of the tax year	US Treasury FMS fiscal data portal

For rental income that arrives monthly, the IRS accepts using the yearly average rate to convert the full year's income and expense figures. This is simpler and legally sound for recurring payments. For one-time large transactions — a deposit returned, an insurance payout, a legal settlement — convert using the spot rate on the date of the transaction.

When reporting the balance of your foreign rental bank account on the FBAR, use the Treasury December 31 rate, not the IRS average. Using the wrong rate can result in a slight understatement of the account maximum value, which technically creates a reporting discrepancy even if trivial.

The Foreign Tax Credit on Passive Income

If the country where your rental property sits taxes your rental income, you can often offset your US tax liability on that same income using the Foreign Tax Credit (Form 1116). This prevents double taxation, but it works differently for passive income than for earned income.

Foreign rental income is classified as passive category income for Form 1116 purposes. This is important because the foreign tax credit is calculated in separate "baskets" — you cannot use excess credits from the passive basket to offset US tax on general (earned) income, and vice versa. If you paid more foreign tax than the US would have charged on the same income, the excess credit carries forward for 10 years.

The foreign tax credit is generally more advantageous than the foreign earned income exclusion for rental income specifically, because the FEIE applies only to earned income — not passive rental income. Even if your wages are fully excluded under the FEIE, your rental income still lands on your 1040 and is subject to US tax before the foreign tax credit is applied.

The 3.8% NIIT Surcharge

The Net Investment Income Tax (NIIT) applies a flat 3.8% to net investment income — including foreign rental income — when your Modified Adjusted Gross Income (MAGI) exceeds $200,000 (single) or $250,000 (married filing jointly) for 2025. The 3.8% applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.

Two critical nuances for expats:

1. The FEIE does not help here. The Foreign Earned Income Exclusion reduces your wages for regular income tax purposes, but it does not reduce your MAGI for NIIT. Expats with significant non-excluded income can still trigger NIIT on their rental income even with wages largely excluded.
2. The foreign tax credit does not offset NIIT. The foreign tax credit reduces regular US income tax only. NIIT is a separate tax with no foreign tax credit offset available. You pay both — the net of the FTC against regular tax, and 3.8% on top for NIIT if you're over the threshold.

Passive Activity Losses: The $25,000 Exception

Under the passive activity rules (IRC Section 469), rental activities are generally classified as passive. Losses from a passive rental can only offset passive income from other passive investments — they cannot offset your wages, business profits, or other active income. This is a real constraint in years when expenses (especially depreciation in early years) exceed rental income.

There is one useful exception. If you actively participate in managing your rental (you approve tenants, set terms, make repair decisions) and your MAGI is under $100,000, you can deduct up to $25,000 of net rental losses against ordinary income. This allowance phases out at $50 for every $1 of MAGI above $100,000 and disappears entirely at $150,000.

For expats, active participation is harder to demonstrate from abroad but not impossible. Using a local property manager does not automatically disqualify active participation — you can still approve tenants, authorize expenditures, and make management decisions remotely. Document these activities (email records, contracts signed, decisions made) to support the active participation position if challenged.

Unused passive losses are "suspended" and carry forward indefinitely until either (a) the property generates passive income in a future year, (b) you generate passive income from another source, or (c) you sell the property. At sale, all accumulated suspended passive losses are released and can offset the gain.

When You Eventually Sell

A brief note on the exit: when you sell the foreign rental property, your US tax calculation involves four layers — the gain from appreciation, depreciation recapture at 25%, any phantom currency gain from a foreign mortgage paid off in appreciated local currency, and potentially NIIT on the gain. For the full picture of these overlapping exposures, see the phantom gains on foreign property sale guide.

The depreciation deductions you claimed (or were required to claim even if you didn't) reduce your basis. At sale, the IRS recaptures those deductions at 25% — so claiming depreciation correctly every year actually matters even if it appears to generate only modest annual savings.

Filing Checklist for Expat Landlords

1. Collect all income records — bank statements, rent receipts, or property manager statements — and convert to USD using the IRS yearly average rate for the tax year.
2. Gather all expense receipts — management fees, repairs, insurance, utilities, mortgage interest, property taxes — converted at the same yearly average rate.
3. Compute depreciation using ADS straight-line: 30 years (residential, post-2018) or 40 years (residential, pre-2018). Exclude land value from the depreciable basis. Report on Form 4562.
4. Complete Schedule E, Part I for each foreign property. Include property address, type, days rented, income, expenses, and depreciation.
5. File Form 4562 with the depreciation schedule attached to your 1040.
6. Complete Form 1116 (passive basket) for any foreign taxes paid on the rental income. Attach to Form 1040.
7. Check your MAGI for NIIT threshold. If over $200K single / $250K MFJ, complete Form 8960 and add the 3.8% NIIT to your return.
8. Check FBAR obligation for the foreign bank account where rent is deposited. If the peak balance exceeded $10,000 during the year, file FinCEN Form 114 by October 15. Use the Treasury December 31 exchange rate for account values.
9. Check Form 8938 (FATCA) if your total foreign financial assets exceed the applicable threshold ($200K single / $400K joint for expats living abroad).
10. Track suspended passive losses — carry forward any losses that exceeded allowable deductions to offset future passive income or the eventual sale gain.

Bottom Line

Foreign rental income is fully taxable in the US, even if you're already paying the local country's taxes. The foreign tax credit typically eliminates double taxation on the income itself, but it cannot touch NIIT — and NIIT applies whether you're in Lisbon or Columbus. Depreciation is slower on foreign property and mandatory on the ADS schedule; ignoring it doesn't help you and hurts you at sale when the IRS recaptures it anyway.

Most expat landlords with a single foreign rental property can handle Schedule E correctly once they understand the depreciation method and the exchange rate distinction. If your property has a foreign mortgage, foreign corporate ownership, trust involvement, or you're approaching the NIIT threshold, the interactions multiply and a cross-border tax professional earns their fee.

For investors managing a US brokerage account alongside foreign rental holdings, Charles Schwab's global account keeps your US portfolio accessible from abroad without the forced account closure that many retail brokerages impose on non-resident address changes.

Sources Checked

IRS Publication 527 (2025 Residential Rental Property); IRS Schedule E Instructions; IRS IRC Section 168(g) — Alternative Depreciation System; IRS Form 1116 Instructions (passive category income); IRS Topic 559 — Net Investment Income Tax; IRS Yearly Average Currency Exchange Rates; US Treasury FMS currency exchange rate tables. All figures current as of June 2026.

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Disclaimer: This article is for general informational purposes only and does not constitute tax or legal advice. Foreign rental property taxation involves complex interactions between US tax law, foreign tax law, and treaty provisions. Consult a qualified cross-border tax professional before filing.