Declaring Property Overseas To The IRS: Critical Points Americans Must Know

An important question came up during the Offshore Summit I hosted in Panama City last week. The question was to do with if and how Americans must report non-U.S. real estate holdings to the IRS.

Specifically, this is the question: Must an American report foreign real estate he owns on the new Form 8938?

No…and maybe.

Form 8938 applies to foreign financial assets. My simplified definition of a “foreign financial asset” is any asset for which the only way you can show ownership is with a piece of paper. This would include bank and stock brokerage accounts (which are also foreign financial accounts reportable on the FBAR); stock certificates you hold directly (whether they’re for a listed company on a foreign exchange or a private company); and things like Perth Mint Certificates (where your ownership of the gold is only indicated on a piece of paper).

Real estate isn’t a foreign financial asset. I’m not the only one who thinks this. The IRS confirms that foreign real estate doesn’t have to be reported on Form 8938…as long as the property is held in your own name.

This is a critical point of distinction that I’ve been making since the form was first created.

One more time, the key is holding the property in your own name. The problem is that you won’t always want to hold real estate in your own name in another country. You would, for example, want to hold foreign property in your own name in any country that doesn’t charge capital gains tax on real estate held in an individual’s name.

Sometimes, though, it will be beneficial for you to hold property overseas in an entity, for either local tax or perhaps inheritance reasons. Holding real estate in a foreign entity (foreign to the country where the real estate is located) can make it possible to avoid local probate. That can be a big deal.

However, hold foreign property in an entity, and you now own a foreign financial asset in the form of that entity. Meet the threshold for Form 8938 reporting, and you’ll have to report that entity…and by default that you own real estate…although you might not actually report the specific details of the property.

In addition, even if you hold a piece of property in another country in your own name, rent it out and you’re required, as a U.S. person, to report the rental income. You’d do this on Schedule E, and the information you’d report includes the property’s address and purchase price if you’re going to depreciate the cost against the revenue.

Really the only offshore real estate you don’t now need to report to the IRS in some fashion is property you hold in your own name and don’t generate any income from. That could be a second home you don’t rent out or a piece of land you don’t farm.

If you are a privacy and asset protection devotee, reporting the foreign real estate you own to the IRS will rub you the wrong way. Fair enough. Remember, though, that owning property overseas, whether in your own name or in an entity, is still an excellent asset protection strategy, as it remains difficult for some litigious-minded person in your home country to get at and grab your foreign real estate…even if the IRS knows it exists.

The other “non-reportable” asset for Form 8938 is metals held directly, whether in your own house or in a third-party vault. Some attorneys have stated that you are meant to report gold and other precious metals on Form 8938. That’s only the case if you’re holding a certificate (such as the Perth Mint Certificates I mentioned above). Hold gold directly in your own name, even if it’s stored in someone else’s vault, and you don’t have to report it on Form 8938 as long as the holdings are allocated. That is, if you can walk into the vault and touch and hold your specific gold, you don’t need to report it.

Again, the IRS has addressed this on its FAQ page for Form 8938.

Finally, a safe deposit box is not a foreign financial asset or a foreign financial account. However, the bearer bonds you might be storing in that safe deposit box are. You need to report them, but not the box.

As I said in my closing presentation at last week’s conference…everybody loves taxes.

Lief Simon