Property ownership overseas can trigger particular tax liabilities. I've discussed taxes that can be associated with purchasing real estate in a foreign country. However, once you've made the investment, you can also have ongoing associated tax burdens. I'll address the generic ones first (that is, the ones that apply to everyone). Then I'll walk you through the specific U.S. tax implications you'll face as an American buying property overseas.

The most obvious ongoing tax associated with owning a piece of property anywhere is property tax. The good news is that not all countries impose one. If your frame of reference is a U.S. state where the property taxes are high, this can be another nice benefit of diversifying overseas in this way.

Property taxes in many countries are managed at the local level—by the municipality, as it were, which oversees collections and sometimes sets the rates. This means that, depending on the country, you may need to know where, exactly, you'll be buying before you can know what your property tax rates might be. Generally speaking, though, property taxes are lower most everywhere in the world than the U.S. average, and, again, not all countries charge them.

Sometimes, a country exempts certain kinds of properties or certain kinds of purchases from property tax for certain periods of time, to incentivize investment. This has been the case in Panama over the past two decades, when the government offered a 20-year tax exemption to all new property purchases, though this exemption is no longer available on new properties. A property tax exemption or no property tax at all is great, of course, but property tax shouldn't be a determining factor for where you decide to invest and certainly not for where you choose to retire. In most of the world, it's a negligible expense.

Another important consideration when investing in a rental property in another country is that many jurisdictions treat rental income like ordinary income for tax purposes. Typically, you'll have to file a tax return in the country at the end of each year to report your rental income and to show the tax owed. Some countries, though, have figured out that foreign property owners don't always report rental revenues. This has led some countries to impose taxes at the source. Practically speaking, this means that, in some places, your property/rental manager will be meant to hold out some percentage of the rental income you earn and hand it over to the government's tax authority. These withholding rates are typically onerous, with the intent of motivating you to file a full and proper income tax return at the end of the year (hopefully to claim back some of the withholding as a refund).

Our rental property in Portugal fell under this kind of system. The withholding was 25% of the rental revenue after deducting the management fee. The rental manager made the withholding payments for us. These payments turned out to be more than we actually owed each year we owned the property. However, the cost of paying a local accountant to file a tax return to claim back the difference was more than the difference. We were, though, able to claim a credit for the taxes paid in Portugal on our U.S. returns.

Some governments have gone so far as to make the proactive presumption that any nonprimary residence is a rental. They then charge you tax on a presumed rental value/income for your property. Spain does this. With so many foreign property owners who use their condos and villas only part-time and rent them out otherwise, the government wants to be sure it's getting a piece of all the rental income being generated within its jurisdiction. The flaw in this approach is obvious. Not every nonprimary residence is a rental and certainly not every nonprimary residence is rented out full time. If you have a holiday home on the Spanish costa that you allow to sit empty when you aren't using it, you won't like this Spanish government tax policy.

Most countries allow you to deduct direct and related expenses against your rental income, including mortgage interest, management expenses, utilities if you're paying them (this would be the case for short-term rentals, for example), and any other direct expenses. What most countries don't allow you to deduct is depreciation. This is a U.S. accounting phenomenon that is also allowed for U.S. tax calculations but typically not elsewhere.

If you are a U.S. citizen holding a rental property in another country, it's treated more or less the same as a U.S. rental property for U.S. tax purposes. You are allowed the same expense deductions, including depreciation (although you have to use a 40-year schedule for non-U.S. property) and the cost of travel to visit and check on the property. You report the rental income on a Schedule E, as you would for any U.S. rental income.

The complications for an American can arise from the tax liability in the country where the property is located. Without depreciation as an expense, you could have a profit in the foreign country and a loss on your U.S. taxes. The tax you pay in the foreign country can be used as a tax credit against any tax owed to Uncle Sam for the same income. If you don't have any net income in the United States, due to depreciation expense, then you have to carry forward the tax credit. Eventually, you may be able to use it. Note, though, that, if you're an American holding foreign property in your own name, that's really the only difference for your U.S. tax-reporting requirements.