As someone who has helped many clients make the leap into the U.S. property market, I know that owning real estate abroad seems like a dream—until tax season arrives. The reporting obligations for foreign property can catch many U.S. tax residents by surprise, especially Brazilians who often own property in Brazil or other countries. In this guide, I want to break down IRS rules for reporting foreign real estate owned directly, explain the role of Form 8938, the FBAR, rental income, foreign tax credits, and the passive activity rules, all backed by the latest data and regulatory guidance. If you read to the end, you’ll be equipped to avoid expensive mistakes and unnecessary stress—and know when to reach out to Heart Mortgage or check our resources for more help.
What directly owned foreign real estate means for tax reporting
First, let's make it clear what directly owned foreign real estate is. This means you, as an individual (or maybe with your spouse), directly own real property—such as an apartment, house, or land—outside of the U.S., not via a corporation or trust. It sounds simple, right? The tricky part comes in understanding which forms you must file and which you can ignore.
Many clients ask whether they must report the value of their foreign property on every IRS form. Here’s the short answer:
- Direct ownership of foreign real estate alone does not trigger FBAR or Form 8938 reporting.
- However, rental income, gains from sales, or property held via foreign financial accounts can mean extra reporting.
If your only foreign asset is real estate you own directly, you can usually breathe easier—but only if you truly own it outright, not through a foreign entity.
Form 8938: Specified foreign financial assets explained
People regularly mix up Form 8938 and the FBAR because of their overlap. But the rules are not identical. The IRS states that while ownership of foreign real estate itself is not reportable on Form 8938, ownership in a foreign entity (such as a partnership, corporation, or trust that owns property) is reportable if thresholds are met. These “specified foreign financial assets” can also include accounts at foreign banks or securities held abroad. So if you hold your apartment in Brazil through a company, you may need to report the value on Form 8938.
The IRS is strict about compliance: failure to file Form 8938 can result in a $10,000 penalty, and it can climb to $50,000 if ignored after notice, as explained on the IRS site (read more about international information reporting penalties).
For most U.S. residents—including those who became residents while investing abroad or holding assets as non-citizens—knowing these facts is critical. If you’re not sure whether a property counts as a reportable asset, review our detailed guidance for foreign national mortgage loans for non-citizens.
The FBAR and when it applies to real estate
One of the biggest misconceptions is that FBAR (Foreign Bank Account Report, FinCEN Form 114) covers all overseas assets. This is a myth. FBAR’s main focus is foreign bank and financial accounts, not directly owned property.
- You must file an FBAR if the value of your foreign financial accounts exceeds $10,000 at any time during the year.
- However, directly owned foreign property is not included in FBAR reporting unless the property itself is titled in a financial account or entity.
- If you have a foreign bank account tied to your rental property (for deposit collection), the account is reportable, but the property itself is not.
I found that in most cases where my clients were confused or worried about FBAR requirements, it was because rental income was flowing through a foreign account. If this sounds like you, it’s time to gather documentation about those accounts—even if the underlying real estate itself is not FBAR-reportable. More FBAR clarifications can be found straight from IRS comparisons of Forms 8938 and FBAR.
Rental income, reporting, and the alternate depreciation system (ADS)
The next pain point for property owners is foreign rental income. The IRS cares about your worldwide income, not just what you make in the U.S. This applies to rental properties in Brazil, Portugal, or anywhere else. Based on IRS data, U.S. taxpayers reported $365.5 billion in foreign-source gross income for 2021—up nearly 50% since 2016.
- Rental income must be reported on your U.S. tax return, usually on Schedule E.
- Maintenance, repairs, taxes, and mortgage interest related to that property are deductible, just as with domestic properties.
- The difference is depreciation: for foreign residential real estate, the IRS requires the Alternate Depreciation System (ADS)—using 30 years instead of the 27.5 years allowed for U.S. property.
This may seem minor, but over decades it means less depreciation and possibly more taxable income.
Using the foreign tax credit and IRS Publication 54
One big fear clients share—especially Brazilians—is being taxed twice: once in Brazil and again in the U.S. That’s where the foreign tax credit (FTC) comes in.
- The FTC lets you claim credits for foreign taxes paid on rental income, subject to limitations.
- To claim the FTC, use Form 1116 and follow the details in IRS Publication 54.
- The amount you claim cannot exceed the U.S. tax attributable to that same foreign income.
The latest IRS statistics show that taxpayers claimed nearly $29.5 billion in foreign tax credits for 2021, which highlights its power in reducing double taxation. If you’re earning rental income overseas and paying local tax, you may have a substantial FTC claim—if you do the paperwork right. I always encourage clients to verify the type of tax, documentation, and eligibility before filing. Our team at Heart Mortgage offers guidance on these technical points.
Passive activity rules for foreign rentals
If you’re not actively managing your foreign property—meaning you’re a passive landlord—the IRS’s passive activity loss rules may apply. Passive activity losses usually can only offset passive income, not other types of income like salary or U.S. business income.
- If rental real estate is a passive activity, you might not be able to deduct losses unless you have other passive income.
- Special rules exist for real estate professionals and for small landlords—be careful to check if you fit the criteria.
- Any unused passive losses may be carried forward to offset future passive income or may be deductible in full when you dispose of the property.
Passive activity rules can hit foreign investors hard, since currency fluctuations and international costs often lead to year-to-year losses on paper. If you want to study other approaches to international property investment, our resource on U.S. real estate investment strategies offers helpful ideas.
Case study: Comparing U.S. and Brazilian owners’ challenges
In my experience, Brazilians and other foreign-born U.S. residents face extra complications. You might have co-ownerships with relatives, receive payments in multiple currencies, or need to open foreign accounts. Reporting this correctly is not just a matter of following rules—they differ from U.S.-only cases.
Some recurring issues I have observed include:
- Confusion about which tax forms to use (8938, FBAR, etc.) when property is held in both individual and corporate titles.
- Difficulty separating foreign rental income from personal use and reporting accordingly.
- Unexpected penalties for late or incomplete filings, sometimes caused by misunderstanding the thresholds or deadlines.
I’ve found many of these struggles are best solved by partnering with knowledgeable advisors who know both ends of the process—ownership, disclosure, and even financing. That’s exactly what Heart Mortgage aims to deliver, from foreign home loan solutions to personalized support for approval, compliance, and everything in between. If you want more detail on how we structure loans or guide international buyers, check our insights on starting a real estate investment in the USA or financing property in the U.S. without a green card.
Conclusion: Let experience guide your decisions
Reporting foreign real estate to the IRS doesn’t have to ruin your peace of mind. If you directly own foreign real estate, the property itself is rarely reportable, but any associated financial accounts or income usually are. Forms like 8938 and FBAR target financial assets, not bricks and mortar—unless you’ve layered your ownership through a company or trust. With international rental income, don’t forget about the alternate depreciation system and proper foreign tax credit claims to avoid paying more tax than you should.
I’ve seen how proactive tax planning changes everything for foreign property owners. If you have questions or want to learn more, Heart Mortgage welcomes you to connect and discover how our solutions and expertise make cross-border real estate—and all its tax rules—so much easier.
Frequently asked questions
What is Form 8938 for foreign property?
Form 8938 is used to report specified foreign financial assets, not direct ownership of foreign real estate. However, you must file it if you own a foreign entity (like a corporation or partnership) that itself owns real estate, once the value exceeds IRS thresholds. Directly owned property, without any entity in between, does not have to be reported on Form 8938.
Do I report foreign rental income to IRS?
Yes, U.S. tax residents must report all worldwide rental income, including that from foreign real estate, on Schedule E of their U.S. tax return regardless of whether the income is taxed in another country.
When is FBAR required for overseas real estate?
FBAR is required only if you have foreign financial accounts—including those used for managing rental property—that exceed $10,000 at any time during the year. The physical property itself is not reportable unless it’s held through a foreign account or entity.
How does foreign tax credit work for property?
If you pay tax on your overseas rental income to a foreign country, you may qualify for a U.S. tax credit for those payments (with some limitations), allowing you to reduce your U.S. tax bill on that income by filing Form 1116.
What are passive activity rules for rentals?
Passive activity rules usually limit your ability to deduct losses from rental property unless you have other passive income or qualify as a real estate professional. Unused losses are typically carried forward or deducted in full on sale of the property.
