u.s. expat tax guide – india
Reporting Indian Rental Income to the IRS
If you’re a US citizenship holder living in India and have property that earns rental income, whether it’s an Airbnb or any rental property, you need to understand how to report this income to the IRS.
Many people mistakenly believe that since the property is outside the US and they’re already paying taxes in India, there’s no need to report it in the US.
The IRS taxes your worldwide income, which means that even if your property is in India and you’re already paying Indian taxes on it, you still need to report that income on your US tax return.
This includes all forms of income, such as salary, business profits, and rental income.
In India, your rental income is likely taxed on your personal tax return, and you’ll need to pay taxes there.
The good news is that when you report this income to the IRS, you may be eligible for foreign tax credits for the taxes you’ve already paid in India. This can help you avoid double taxation and potentially reduce your US tax liability.
How does depreciation work for rental properties outside the US?
One advantage of reporting rental income to the IRS is that you can take a depreciation deduction on your property.
This deduction is not available in India but can significantly reduce your taxable income in the US. For properties located outside the US, the IRS uses a 30-year depreciation schedule. This means that if your property is worth US$100,000, you can depreciate it over 30 years, taking a deduction of US$3,333 each year on your US tax return.
Depreciation allows you to reduce your taxable income, which can sometimes turn a profit on your Indian rental property into a loss on your US tax return. This loss can be carried forward to offset future rental income or even other income in some cases.
If you eventually sell the property, any losses that weren’t used can help lower your capital gains tax.
Can you use foreign tax credits to reduce your US taxes?
If you’re paying taxes on your rental income in India, you can use the Foreign Tax Credit (FTC) to reduce your US taxes on that same income. The IRS allows you to take a credit for the taxes you pay to a foreign government, which helps ensure that you don’t get taxed twice on the same income.
For example, if you pay US$2,000 in Indian taxes on your rental income, you can use that US$2,000 as a credit against your US tax liability for that income.
The Foreign Tax Credit can be carried forward for up to 10 years if you can’t use the full amount in the current year. This means that if you have more credits than you need in a particular year, you can use them in future years to lower your US taxes.
Is Form 8858 required for rental properties abroad?
Many people think of Form 8858 as something required only for businesses. However, if the IRS considers your rental property outside the US as a business, you may need to file Form 8858 as well.
If you’re unsure whether you need to file Form 8858, it’s best to consult with a tax professional. Failing to file required forms like Form 8858 can lead to significant penalties, starting at US$10,000. It’s always better to be compliant and avoid any unnecessary issues with the IRS.
What happens if you don’t report rental income?
Not reporting your rental income can lead to serious consequences. Many US citizenship holders believe that since their rental property is in India, they don’t need to report it in the US.
However, this is incorrect, and failing to report the income can result in penalties and interest on the unpaid tax.
Additionally, by not reporting the income, you’re also missing out on deductions like depreciation and potential loss carryforwards. If you later decide to sell the property, you’ll need to report the sale to the IRS, and any previous unreported rental income could come back to haunt you.
How can rental losses help lower your taxes?
One of the benefits of reporting rental income to the IRS is that you can use rental losses to offset other types of income.
For example, if your rental property in India generates a profit of US$10,000, but you have US$3,333 in depreciation expenses, your net profit would be US$6,667. If you also have other expenses related to the property, such as repairs or maintenance, these can further reduce your profit.
In some cases, the deductions might exceed your rental income, resulting in a net loss.
This loss can be used to offset other income, such as salary or business profits, helping to reduce your overall US tax liability. If you don’t have enough income to use the loss in the current year, it can be carried forward indefinitely until you sell the property or have enough income to offset it.
