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U.S. EXPAT TAX GUIDE – MEXICO

Do you need to report rental income from a Mexican property to the IRS?

Yes, as a US citizen, you must report all rental income from a property in Mexico to the IRS. This applies whether you rent it out long-term or through platforms like Airbnb.

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How do you report rental income on your US tax return?

Start by listing the total rental income you received during the year. Next, subtract expenses related to managing or maintaining the property (like repairs, utilities, or property management fees). 

If your income exceeds your expenses, the net amount is taxable in the US. If the expenses are greater than the rental income, you may report a loss, which can be used to offset future gains or current-year taxable income depending on the situation.

How does ownership structure impact rental income reporting?

The structure of the property ownership plays a role in how income is reported. 

For example, if you co-own a rental property with a non-US spouse, you only need to report your share of the income and expenses. This would be 50% of the rental income and 50% of the related costs on your US tax return, assuming equal ownership.

Do you need to file Form 8858 for rental income?

Yes, if you are receiving rental income from a property outside the US, you must file Form 8858 along with your US tax return. 

This form provides additional details about your foreign income, expenses, and ownership of foreign property, similar to what you would do with Schedule E for domestic rental properties. 

Failing to file Form 8858 can lead to penalties, which can reach up to US$10,000. If you’ve missed multiple years of filing, the Streamlined Amnesty Program can help you catch up without facing penalties.

When is a home not considered a rental property?

If the home is used mainly for personal reasons or rented out for fewer than 15 days a year, the IRS does not treat it as a rental property. In these cases, you don’t need to report the rental income, but you also can’t deduct any related expenses.

Minimal Rental Use

If you rent the property for less than 15 days, the rental income is not reported, and rental-related expenses aren’t deductible.

Personal Use

If the property is used for more than 14 days for personal use or over 10% of the total days rented, it may not be classified as a rental property. In this situation, you can only deduct rental expenses up to the amount of rental income, and expenses related to personal use are not deductible.

Examples of personal use and rental use tax treatment

Usage Type Description Tax Treatment
100% Rental Property Property rented year-round, with no personal use Report all rental income on Schedule E; deduct all expenses.
Mixed-Use Property Property used both for rental and personal purposes Allocate expenses based on the number of days used for rental vs personal.
Minimal Rental Use Property rented out for fewer than 15 days No need to report rental income, but also no deduction for rental expenses.


What expenses can you deduct from rental income?

There are various expenses that can be deducted from your rental income, which can help lower your taxable income. Some of the common deductible expenses include:

  • Mortgage Interest: Deduct interest paid on the mortgage for your rental property.
  • Property Taxes: Any property taxes paid to Mexican authorities can be deducted.
  • Insurance: Deduct the cost of insuring the rental property.
  • Repairs and Maintenance: Any expenses to keep the property in good condition are deductible.
  • Utilities: If you cover utilities and your tenant does not, these costs are deductible.
  • Depreciation: You can deduct an annual amount based on the value of the property over its useful life.
  • Travel Expenses: Any travel costs incurred for maintaining or managing the property are deductible.
  • Advertising: If you spend money to advertise the property for rent, those costs can be deducted.
  • Professional Fees: Costs related to legal or property management services can also be deducted.

Should you hire a tax professional for rental income reporting?

Yes, hiring a tax professional is strongly recommended. Given the complexity of reporting foreign income and expenses, a professional can help you navigate IRS requirements, claim the appropriate deductions, and stay compliant.

What are some other considerations for managing rental income from a foreign property?

Currency Conversion

The IRS requires that all foreign income and expenses be reported in US dollars. You will need to convert Mexican pesos to USD using the correct exchange rate. You can use the average annual exchange rate or the exchange rate on the date of each transaction.

Documentation

It’s important to keep accurate and detailed records of all rental income and expenses related to the property. Documentation is crucial for supporting any deductions you claim, particularly if you are ever audited by the IRS.

FBAR and FATCA Reporting

If you deposit your rental income into a foreign bank account and the total amount in all your foreign accounts exceeds US$10,000 at any point during the year, you are required to file FBAR (FinCEN Form 114). Additionally, if the value of your foreign financial assets exceeds certain thresholds, you may need to file Form 8938 under FATCA.

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.

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