When you own investment homes, many of your expenses are deductible. Furthermore, the Internal Revenue Service doesn't care whether the home is in Frankfort, Kentucky or Frankfort, Germany. Wherever you own the house, as long as it's a legitimate investment, it's deductible. Investment properties in foreign counties can even generate some extra travel deductions that make up for the complexity of potentially having to pay taxes in two countries.
Investment Homes and Deductions
When you own a home for investment purposes, you aren't limited to writing off interest and property taxes. Any operating expense that you incur in owning the property is deductible, including advertising, management and maintenance. You can even write off a portion of the building's value every year as depreciation, further reducing your taxes. If you end up with a loss on your investment home abroad, referred to as a passive activity loss, you might even be able to deduct up to $25,000 of it from your taxes if your adjusted gross income falls below a $100,000 threshold.
You can enjoy your foreign rental home, too. The IRS allows you to allocate the house between business and personal uses. For instance, if you rent it out for 200 days per year, and spend an additional 21 days in the house personally, 90.5 percent of your expenses are still deductible as rental expenses on Schedule E.
If you use the house personally and incur losses, you could lose the ability to write off those losses against your income, though. The IRS won't let you claim passive activity losses if you spend 14 or more days in the house, or 10 or more percent of the total days that the house is rented out in it -- whichever is less. When you hit this threshold, you lose the ability to write off any passive activity losses against your regular income.
The IRS allows you to write off the cost of traveling to your rental property to collect income or to "manage, conserve or maintain" it, according to Publication 527. You can still write off all of the costs of a trip that is at least 75 percent business-related. In addition, if your trip has a mixture of business and personal activities where the personal time exceeds 25 percent, you can deduct a proportionate share of your travel, provided that you aren't primarily just going on vacation and stopping in at the property.
Wherever you own your investment property, find a good local accountant that can help you understand what your tax liabilities are in that country. Usually, if you earn money in a country, you'll have to pay some tax on it there. There's a good chance that you won't get double-taxed, though. The United States usually lets you claim a credit or deduction for any foreign taxes that you paid against your domestic income taxes.
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