The U.S. government requires Americans to report their foreign rental property investments on pain of sometimes massive penalties, regardless of where they are living. This is of course in addition to local Czech tax returns. Luckily, if the accountant understands both Czech and U.S. reporting, both can be prepared from the same set of accounts – resulting in perfectly reconciled accounts, higher levels of compliance and reduced tax risk. The approaches are quite different. Some examples:
Czech Republic U.S.
No capital gains tax; Flat income/corp tax 15%+ Capital gains tax
27 year depreciation rate 40 year depreciation rate
Account units together Account units separately
Recognize rental losses without limitation Recognize rental losses up to rental income
Rental losses offset self-employment income Rental losses do not offset self-employment income
The Forms
The forms to be filed vary with the type of filer and number of filers. The type of filer may be a physical person (one or more) or a legal entity (one or more), or mixed.
Physical persons
Physical persons file their tax returns on foreign residential real estate investments on their annual individual tax return, usually including the following schedules:
- Schedule B Interest – in case the investment has interest income
- Schedule C Trading – used in case the investment also has related, non-rental income.
- Schedule D Capital gains – used in connection with the disposition of an asset
- Schedule E Rental income – rental income
- In addition:
- TDF90-22.1 Bank Accounts Report – filed by June 30 with the U.S. Treasury, is required of all persons owning an interest in or signature authority over 1 or more non-U.S. accounts that in aggregate had in excess of $10.000 or equivalent value during the course of the prior year.
- Form 8938 Foreign assets report – filed with form 1040 by taxpayers holding foreign assets of $100.000 in or more. Limits vary by country of residence.
Note that the investment into a residential rental property by two physical persons is considered a partnership by the IRS, regardless of whether there is a formal, written partnership agreement. This investment is best filed on the personal return using a K-1 prepared in accordance with form 8865 Foreign Partnerships return rules, although it is not required to use the form.
Legal Entities
Investors that own real estate through foreign legal entities must file form TDF and form 8938. They also must file form 926 Return of a U.S.Transferor of Property to a Foreign Corporation and at least one of the following forms:
- 5471 Certain Foreign Corporations
This is the default tax classification for investments into Czech s.r.o.s.
- 8865 Foreign Partnership
- Investments through a legal entity (s.r.o.) by two or more shareholders might be reclassified to a partnership by filing form 8832.
- 8858 Foreign Disregarded entity
- Investments through a legal entity (s.r.o.) by a single sharheolder might be reclassified to a foreign disregarded entity by filing form 8832.
If you do not register the investment and company in a timely manner (usually by the time of the first tax reporting deadline or as extended, after the investment), you will need to follow a special process to avoid penalties.
Unfortunately, US reporting for American investments abroad is very complicated and the penalties for making mistakes is great. If you need guidance, please contact us and we will see what needs to be done.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this email was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code section 6662(d).
