Income Tax

Americans are taxed on their worldwide income no matter where in the world they're living. That means that, even if you move overseas to manage your cash-flow properties directly, you'll have to file a tax return with the IRS annually and you could owe them money. You may also have a tax filing and/or a tax payment requirement in the countries where you own properties. The possible permutations of what your tax situation might look like in the United States or in the countries where you might invest are many. You should seek professional tax advice, but here are some getting-started guidelines.

In the United States, you'll report rental income from properties overseas as you would report income from U.S. rental properties on Schedule E. You can take the same deductions for an overseas property as you would for one in the United States, with the exception of depreciation. It's calculated on a 40-year schedule for foreign properties.

If you invest in a farm property and aren't doing the farming yourself, the income should qualify as farm rental income category, which you report on Form 4835. Do the farm work yourself, and the income is reported on Schedule F. The important difference is that Schedule F income is charged as self-employment tax. Don't let your accountant tell you that you have to use Schedule F to report income from an agricultural investment when you're not doing the farm work yourself.

One benefit of buying investment property in places you like spending time is that you can deduct travel expenses when checking on your properties.

In the country where the property is located, your tax liability depends on whether you're living there. Spain, for example, charges 24% tax on gross rental income earned by a non-EU resident. Live in Spain or another EU (or EEA) country, and the tax is 19% of the net-rental-income earned (deductions aren't the same as you are allowed in the United States).

Other countries tax at source—that is, as the rental income is earned. Income from our rental property in Portugal was taxed at 25% after deducting the rental management fee. Our rental manager figured the tax and sent the amount owed to the Portuguese government. We got the balance. Because that was our only income in Portugal, no annual tax return was required.

Some countries treat rental income like regular income for foreigners. Because there's typically a minimum threshold before income tax is charged, you may not owe any tax on your rental income. In Panama, for example, the rate is 0% up to $11,000 of income. If your net rental income is less than $11,000, you owe no tax. However, you're still meant to file a tax return to report the income.

In a few cases, you may not owe any tax no matter how much revenue you've earned. Income from timber investments is tax exempt in many countries if the project is properly registered. Panama doesn't tax revenue from agriculture if the gross income for the farm is less than $350,000. Of course, an American is still liable for tax on that income in the United States.

For any tax you pay to another country for income that is also taxable in the United States, you can take a foreign tax credit on your U.S. tax return. Do this on Form 1116. Since depreciation of the property is allowed for U.S. taxes but is not allowed in many other countries, it's possible you could have less taxable income in the United States than you do in the other jurisdiction. Any foreign taxes that you can't take a credit for in one year can be carried forward to future years. If you do your own taxes on a program like TurboTax, the program can take care of the calculations and any carry-forward amounts.

Property Tax

Property taxes vary by country but typically amount to much less in most of the world than you're likely paying in the United States. In Belize, for example, your annual property tax on a $100,000 property might be $10. It will cost you more in gas to drive to the government office to pay the tax than the amount of the tax. Fortunately, Belize allows you to pay in advance. Keep your receipt in case the record of your payment is lost. It's Belize.

In many countries in Latin America, including Panama and Colombia, property taxes are paid quarterly. In Colombia, you'll receive your property tax bill in the mail. In Panama, you won't. You'll have to go (or send someone) to the property tax office to review the bill and pay it. Colombia has an online payment option. You'll need a local bank account to take advantage of it.

France imposes two taxes related to property—the taxe foncière and the taxe d'habitation. The first is the actual property tax. The second is an inhabitant tax. You'll pay both if you're renting your property short term. However, if you're renting long term, furnished or unfurnished, your tenant is meant to pay the taxe d'habitation if they're living in the apartment as of the first of January of that tax year.

Capital Gains Tax

Not all countries charge capital gains tax on real estate. Most that do impose a special rate, but a few tax capital gains as ordinary income.

New Zealand doesn't tax capital gains at all, not on real estate or on anything else. In France, you'll pay tax on capital gains from the sale of real estate according to a schedule that reduces the amount owed starting after five years of ownership. Hold the property for 22 years or more, and the capital gains tax is zero when you sell. Unfortunately, France has implemented an additional social tax on gains. This also is reduced over the time you own the property, starting with the sixth year, but it doesn't go away completely until you've owned the property for 30 years.

Some countries apply an inflation rate to adjust the gain calculation so it's based on a current value of the original purchase price. Some have exemption amounts that reduce the taxable gains.

Americans are liable for capital gains tax in the United States no matter where they live or where the property overseas is located. However, the foreign tax credit comes into play here, as well, and you shouldn't pay more in capital gains taxes than the highest applicable tax rate. For example, if you're taxed 10% on your gain in the foreign country and you fall into the 15% capital gains tax rate in the United States, you'd owe the IRS the 5% difference. Some deductions are allowed when calculating the gain.