U.S. EXPAT TAX GUIDE โ INDIA
Do US expats need to report Indian rental income to the IRS?
Yes, if you are a US citizen or Green Card holder with rental income from a property in India, you must report it to the IRS. The US tax system requires reporting all worldwide income, including earnings from salaries, businesses, and rental properties.
Table of contents
ย
Even if you pay taxes in India, you still need to include this income on your US tax return.
The IRS offers relief through foreign tax credits. These credits help offset taxes already paid in India, so you donโt pay taxes twice on the same income.ย
For example, if you paid US$3,000 in Indian taxes, you could apply this as a credit directly to your US tax bill. This keeps you from paying more than you should, while also following the rules of both countries.
If you donโt report this income, you could face penalties, interest on unpaid taxes, or even audits. The IRS regularly reviews international tax filings, so itโs better to stay open and honest in your reporting.
How can depreciation reduce your taxes?
Depreciation lets you deduct the decrease in your propertyโs value over time due to wear and tear.ย
For foreign properties, the IRS uses a 30-year schedule. This means you divide the value of the property (excluding land value) by 30 to figure out the yearly deduction.ย
For example, if your propertyโs value is US$150,000, you can claim about US$5,000 each year as a deduction on your US tax return. This benefit isnโt available in India, making it helpful for US taxpayers.
Depreciation lowers taxable income, which can sometimes turn what looks like a profit into a tax-deductible loss.ย
For example, if your Indian property earns US$10,000 in annual rent but you claim US$5,000 in depreciation and US$3,000 in maintenance costs, your taxable profit drops to US$2,000. If expenses are higher than your income, you can report a loss instead. This loss can reduce other income, like wages, or be carried forward to cut taxes in later years.
When you sell the property, the IRS will adjust for the depreciation youโve claimed, meaning you may have to pay taxes on that amount. Even so, this is often taxed at a lower rate than regular income, helping you save over time.
What are foreign tax credits, and how do they help?
Foreign tax credits (FTC) let you reduce your US taxes by the amount of tax paid to another country. If youโve already paid taxes on rental income in India, the FTC makes sure you donโt get taxed twice on the same income.
If you owe US$3,000 in Indian taxes on your rental income, you can apply that as a credit against your US tax bill. If your US tax on the same income would have been US$4,000, the credit means youโll only owe US$1,000 more. Any leftover credits can be carried forward for up to 10 years or back one year, giving you some flexibility.
Youโll need to file Form 1116 to claim the FTC. This form helps calculate the credit and ensures your foreign income is properly reported.
Do you need to file Form 8858 for a foreign rental property?
Form 8858 may be needed if the IRS treats your foreign rental property like a business. Although this form is mostly for businesses, some rental properties can fall into this category.
If youโre unsure, itโs a good idea to check with a tax professional. Not filing a required form like Form 8858 can lead to penalties starting at US$10,000. Staying up to date on whatโs needed will save you from future problems.
What happens if you donโt report rental income?
Not reporting rental income can cause trouble. The IRS may charge penalties, interest on unpaid taxes, or even audit your finances. Some US expats think income from properties outside the US doesnโt need to be reported, but this is wrong.ย
The IRS taxes all income earned worldwide.
By not reporting, you also miss out on benefits like depreciation and the chance to carry forward losses. If you sell the property in the future, any unreported income could make things more complicated and lead to higher taxes.ย
The IRS might also review past filings, which could add to your problems.
Can rental losses lower your US taxes?
Yes, reporting rental losses can help reduce your taxes. For instance, if your Indian property brings in US$12,000 in rent but you deduct US$4,000 for depreciation and US$3,000 for repairs, your taxable income drops to US$5,000.ย
If your total deductions are more than your rental income, you can report a loss.
These losses can offset other types of income, such as wages or business earnings, lowering your overall tax bill. If you canโt use the loss right away, you can carry it forward to cut taxes in future years or apply it when you sell the property. This can add up to big savings over time.
How can you make tax reporting for Indian rental income easier?
Dealing with taxes for overseas rental income can feel complicated, but a clear plan makes it easier. Keep detailed records of your rental income, expenses, and taxes paid in India. Use reliable tax software or consult with an advisor to make sure all deductions and credits are included.
By using options like depreciation, foreign tax credits, and loss carryforwards, you can reduce your taxes while meeting IRS rules. Reporting properly not only avoids penalties but also helps you make the most of your property ownership abroad.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.