Foreign Property and US Tax: Rental Income, Depreciation and Selling Up

Rental income goes on Schedule E — in dollars

A non-US rental property is reported exactly where a US one is: Schedule E of your Form 1040, with rents as income and the usual deductions against it — mortgage interest, repairs, insurance, letting agent fees, local property taxes and depreciation.

Every figure must be translated into US dollars, generally using the exchange rate when each item arose (an annual average rate is accepted in practice for regular flows). That translation is why your US rental result will not match your UK Self Assessment figure even before the rulebooks diverge — and diverge they do: the UK restricts mortgage interest relief for individuals and does not use depreciation, while the US requires depreciation and allows interest against rental income. The same flat routinely shows different profits in each country.

If UK tax is due on the profit, the foreign tax credit generally relieves the double charge on the US side.

Depreciation: foreign property is on a slower clock

US rules require residential rental property to be depreciated — but a property outside the US depreciates over a 30-year period under the alternative depreciation system, rather than the 27.5 years used for US property (foreign property placed in service before 2018 was on a 40-year schedule). Land is never depreciable, so the purchase price must be split between building and land.

Depreciation is not optional in any meaningful sense. When you sell, your cost basis is reduced by the depreciation that was allowable, whether or not you claimed it, and the gain attributable to it is recaptured at unfavourable rates. Owners who never claimed depreciation get the recapture without ever having had the deductions — a genuinely bad outcome that proper filing avoids.

Selling: two tax systems, one gain, several currencies

Selling a foreign property triggers US capital gains tax on the gain computed in dollars: sale proceeds translated at the rate on the sale date, minus cost basis translated at the rate on the purchase date. Exchange-rate movement between those two dates is baked into the taxable gain — you can have a dollar gain on a property that lost value in pounds, purely because sterling strengthened.

If the property was your main home, the principal residence exclusion — up to $250,000 of gain, or $500,000 for a married couple filing jointly, subject to the ownership and use tests — applies to a foreign home just as it would to a US one. Periods of rental use complicate the picture through depreciation recapture and non-qualified use rules.

For UK property, the UK will usually also tax the gain (UK residents report residential disposals within 60 days), and coordinating the two computations — different reliefs, different dates, different currencies — is where the US–UK property analysis earns its keep.

The foreign mortgage trap

Here is the one nobody sees coming. A mortgage in a foreign currency is, to the IRS, a debt denominated in a "nonfunctional" currency. If you repay it — on sale, refinancing or early repayment — when the dollar has strengthened since the borrowing, you are treated as having made an exchange gain on the debt, taxable as ordinary income. You borrowed pounds worth more dollars and repaid pounds worth fewer; the difference is gain, even though your bank balance never felt it.

The asymmetry stings twice. The currency loss on a personal-purpose mortgage, when the dollar has weakened, is generally a nondeductible personal loss. And the mortgage gain cannot be netted against a currency-driven loss on the property itself — they are separate calculations. Remortgaging alone can crystallise the gain, without any sale at all.

Keeping it manageable

Foreign property is one of the most rule-dense areas an expat return touches, but it rewards routine: a purchase-price split done once, a depreciation schedule maintained every year, exchange rates recorded as you go, and both countries' returns prepared from the same set of facts. Done that way, even the sale — currency calculations and all — is arithmetic rather than archaeology.