A rental abroad goes on Schedule E like any other rental, with three differences. The building is depreciated over 30 years under the alternative depreciation system, not 27.5. Every figure must be translated into dollars. And the property itself is not reported on Form 8938, though a foreign entity holding it is.

6:40. The written version, the figures and the sources are all below.

The figures that govern a rental outside the United States

ADS recovery period	30 years	Residential rental property used predominantly outside the US, placed in service after 2017.
Pre-2018 property	40 years	Foreign property already in service before January 1, 2018 stays on the old schedule.
Domestic comparison	27.5 years	The GDS period. It does not apply to property used outside the US.
Functional currency	US dollar	For every taxpayer except certain qualified business units.
Form 8938 threshold	$50,000 / $75,000	Single, living in the US. $100,000 / $150,000 filing jointly.
FBAR threshold	$10,000	Aggregate across all foreign accounts, at any moment in the year.
IRS yearly average rate, 2027	TK · 2027-yearly-average-rate	IRS posts a yearly average rate for each currency after the year closes.

A rental abroad goes on Schedule E like any other rental. Three things change — the depreciation schedule, the currency, and who has to tell the Treasury about it.

A flat in Bengaluru, a house in Lisbon, an apartment in Warsaw that used to be a grandmother’s. Foreign rental property shows up in a US practice constantly, and the returns arrive with the same three errors so reliably that I now check for them before I read anything else. The rental itself is not exotic — it goes on Schedule E, income less expenses, exactly like a duplex in Somerville.

What changes is the depreciation schedule, the currency, and the reporting. Get those three right and the return is ordinary. Get the first one wrong and you have understated income every year the property has been rented, which is a problem that compounds quietly until the year you sell.

It is still a Schedule E rental

US citizens and residents are taxed on worldwide income, so rent from a property abroad is reported the same way rent from a property in New Jersey is: Schedule E, gross rents at the top, ordinary and necessary expenses below, depreciation on Form 4562. Mortgage interest, insurance, management fees, repairs, utilities and travel to the property are all deductible on the same terms.

The passive activity loss rules apply unmodified too. A loss from the property is generally passive and suspended unless you qualify for the $25,000 active participation allowance or for real estate professional status. Nothing about the property’s location changes any of that.

So the question is only ever: what is different? Three things, and one of them is expensive.

The 30-year rule almost everyone misses

Section 168(g) requires the alternative depreciation system for any tangible property used predominantly outside the United States. That takes the property out of the 27.5-year general depreciation system entirely. Under ADS, residential rental property has a 30-year recovery period, straight line, and there is no bonus depreciation available on it.

	Rental in New Jersey	Rental in Portugal
System	GDS	ADS — required by §168(g)
Recovery period	27.5 years	30 years
Method	Straight line, mid-month	Straight line, mid-month
Bonus depreciation on the building	No	No
Appliances and furniture	5 years	9 years under ADS
Placed in service before 2018	27.5 years	40 years

That 40-year figure in the last row matters if you inherited a return rather than starting one. IRS Publication 527 puts the ADS period for residential rental property at 30 years with a footnote: 40 years for property placed in service before January 1, 2018. The 30-year fallback for older property applies only to an electing real property trade or business whose property was not already caught by section 168(g)(1)(A) — and foreign-use property is exactly what 168(g)(1)(A) catches. So a foreign rental that went into service in 2015 stays on 40 years.

Foreign rental property and US taxes: the currency step

The IRS is blunt about this: you must express the amounts you report on your US tax return in US dollars, and the US dollar is the functional currency for all taxpayers except certain qualified business units. A personally owned rental abroad is not a QBU. So every euro, rupee or zloty has to be translated, and the general rule is to use the exchange rate prevailing when you receive, pay or accrue the item.

1. Rent received monthly: translate at the spot rate on each date received, or use the IRS yearly average rate for that currency if receipts are spread evenly through the year.
2. Expenses: translate at the rate on the date each one was paid. A single annual insurance premium is translated on its own payment date, not at the average.
3. The building’s basis: fixed in dollars at the exchange rate on the day you acquired it, and never re-translated. Your depreciation deduction is the same dollar figure every year regardless of what the currency does.
4. Foreign tax paid: translate at the rate on the date of payment if you are on the cash basis for foreign taxes.

Pick one defensible method, document the source, and use it consistently. The IRS says exchange rates are generally available from banks and US embassies and publishes a yearly average table of its own. What it will not accept is a rate chosen after the fact because it produced a better answer.

Property taxes: two different answers, and both are right

This is the one that sounds like a contradiction. Since 2018, an individual cannot deduct foreign real property taxes as an itemized deduction — section 164(b)(6)(A) removes them from Schedule A entirely, so the tax on a holiday home abroad is simply not deductible.

But the same paragraph ends with a sentence that saves the rental case. The disallowance does not apply to taxes paid or accrued in carrying on a trade or business or an activity described in section 212 — and holding property for the production of rental income is exactly a section 212 activity. Foreign property taxes on a rental therefore stay fully deductible against the rent on Schedule E.

The foreign tax credit, and the basket it lands in

Most countries tax rent at the source, so you will usually be paying tax twice and relieving it with a foreign tax credit on Form 1116. Rental income is passive category income unless the rents are derived in the active conduct of a trade or business, which a single let property normally is not. That means it goes in the passive basket, and credits in one basket cannot be used against income in another.

The credit is also capped. It cannot exceed your US tax multiplied by the ratio of foreign source taxable income to total taxable income — which in practice means it cannot exceed the US tax on that rental income. And here is the part that surprises people: the 30-year depreciation deduction reduces the US taxable income from the property, which reduces the ceiling, which strands credits.

Note what happens if the return had used 27.5 years by mistake. Depreciation would be $13,382 rather than $12,267 — $1,115 too much every year. Taxable income drops, the credit ceiling drops with it, and the return looks fine because the foreign tax credit absorbs the difference. The error is invisible until the property is sold and basis is recomputed.

Form 8938: the distinction that decides whether you file

This is the question I am asked most often, and the answer is cleaner than people expect. The IRS states it directly: foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. A personal residence or a rental property does not have to be reported.

The very next sentence is the one that matters. If the real estate is held through a foreign entity — a corporation, partnership, trust or estate — then the interest in the entity is a specified foreign financial asset, reportable if your total specified assets exceed the threshold that applies to you. Many countries encourage or require foreign buyers to hold property through a local company, so this is not an edge case.

How the property is held	Form 8938	Other forms to expect
Directly, in your own name	Not reportable	Schedule E, Form 1116
Through a foreign corporation	The shares are reportable	Possibly Form 5471
Through a foreign partnership	The interest is reportable	Possibly Form 8865
Through a foreign trust	The interest is reportable	Possibly Forms 3520 and 3520-A
Rent collected in a foreign bank account	The account is reportable	FBAR as well

FBAR, and the account the rent lands in

Almost every foreign rental has a local bank account behind it, because that is how the tenant pays and how the management company is paid. That account is a foreign financial account, and if the aggregate value of all your foreign accounts exceeded $10,000 at any time during the calendar year, you file FinCEN Form 114 — the FBAR — electronically through the BSA E-Filing System.

• The threshold is aggregate and momentary. One day above $10,000 across all accounts triggers the filing for the whole year.
• It applies to accounts you control as well as accounts you own — including an account a property manager holds that you can direct.
• The FBAR is due April 15, with an automatic extension to October 15 that you do not have to request.
• It is a separate filing from Form 8938 and from the return itself. The same account can appear on both.

If a foreign rental has been sitting on returns for years with 27.5-year depreciation, no FBAR and no thought given to the property tax split, the fix is not to quietly change the schedule going forward. Episode 35 covered the streamlined filing compliance procedures for exactly this situation, and the choice between amending and using a compliance programme should be made deliberately.

Frequently asked questions

Is foreign rental property depreciated over 27.5 years or 30 years?

Thirty years, straight line, under the alternative depreciation system. Section 168(g) requires ADS for tangible property used predominantly outside the United States, and the ADS recovery period for residential rental property is 30 years. Property placed in service before January 1, 2018 remains on the older 40-year schedule.

Do I have to report my foreign house on Form 8938?

Not if you hold it directly. The IRS states that foreign real estate is not a specified foreign financial asset — a personal residence or a rental property does not have to be reported. If you hold it through a foreign corporation, partnership, trust or estate, the interest in that entity is reportable once your specified assets exceed your threshold.

Can I deduct the foreign property tax I pay?

Against rental income, yes. Section 164(b)(6) removes foreign real property taxes from Schedule A for individuals, but the disallowance does not apply to taxes paid in carrying on a trade or business or a section 212 activity. Property tax on a rental therefore remains fully deductible on Schedule E. On a purely personal home abroad, it is not deductible at all.

Which exchange rate should I use?

The rate prevailing when you receive, pay or accrue each item. For rent collected monthly, either the spot rate on each date or the IRS yearly average rate for that currency is defensible. The building’s basis is fixed in dollars at the rate on the acquisition date and is never re-translated, so your depreciation deduction does not move with the currency.

Do I need an FBAR for the account my tenant pays into?

If the aggregate value of all your foreign financial accounts exceeded $10,000 at any moment during the calendar year, yes. FinCEN Form 114 is filed electronically, is due April 15 with an automatic extension to October 15, and is separate from both your tax return and Form 8938. Accounts you can direct but do not own count too.

This article is general educational information, not individualized tax or investment advice. Figures cited are subject to IRS adjustment. Consult a qualified professional about your own facts.