What If I Own Real Estate In a Foreign Country? Answers Here!

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There's this question that I always get from my clients: "Do I have to report my real estate holdings in a foreign country?" To which, my answer (in true accountant style) is always: "It depends". Let me explain further. 

You may be a first generation immigrant to the US and still have strong ties to your home country; by way of family elders who live there or a strong sense that you would like to some day retire back there, where you grew up. Or you are an adventurous investor who would like to invest in a little vacation home by the beach in the Caribbean. Or you were stationed abroad through your job and loved it so much that you invested in some property there. Then this blog is for you to read! 

The FATCA makes it mandatory for U.S. citizens, Green Card holders and foreign individuals with substantial presence in the US, to disclose all of their offshore holdings on their tax returns (via Form 8938), or on the FBAR, now known as Form FinCEN 114. Due to Inter-Governmental Agreements (aka IGA s), foreign financial institutions also disclose this information to the U.S. government. 

Bengaluru, Karnataka, India

Form 8938, Statement of Specified Foreign Assets, applies to foreign financial accounts, including stock in foreign companies and stakes in foreign business partnerships. So, what about your real estate holdings in foreign countries, do they have to go on these forms? 

If your foreign real estate holdings were held directly by you, then it is NOT a specified asset that needs to be reported on Form 8938, for example, your personal residence or a rental property.

Please do not stop here! Read On! 

A. If these real estate holdings were held by a foreign entity, such as a foreign corporation, partnership, estate or a trust, in which you have an interest, then ONLY the investment in this foreign entity must be reported on Form 8938, if the form thresholds are met. 

The value of this interest would be determined by the fair market value of the real estate holdings.

If point # A applied to you, there are other reporting requirements in addition to Form 8938. 

B. If the foreign property is in your name and is rented out, the rental income is to be reported on Schedule E of Form 1040.  The allowable expenses are the same as if the rental property was in the US, however, the depreciation is taken straight-line over a period of 40 years instead of 27.5 years. 

C. If the foreign property was inherited, if the inherited property was transferred to your personal name then it not a specified asset to be reported on Form 8938 unless the inheritance was an interest in a corporation, partnership or trust that held real estate. 

D.If the foreign property in your personal name were to be sold,   you will have to report short term or long term capital gains, as the case may be, via Schedule D to Form 1040 in the year the sale occurred. You may be eligible to get a foreign tax credit against your US taxes, if taxes were paid on the sale in the foreign country where the property was located. 

E.  If the foreign property was your personal residence, that is if you lived in the foreign property, 2 out of previous 5 years, immediately prior to the sale, you may be eligible for an exclusion on the sale- of $250,000 if filing as single or $500,000 if filing married & joint.

Agreed that owning property in a foreign country is not a walk in the park, but understanding the rules and regulations will keep you in compliance, and will make it manageable. Please make sure you completely understand your compliance requirements if any of the above apply to you. Better yet, consult an Enrolled Agent! 

Bibliography: Form 8938, Statement of Specified Foreign Financial Assets; Form 1040 & Schedules D & E; Internal Revenue Code § 121; Publication 946. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com. 

"MyRa"...A New Retirement Buzz Word Or a Dud?

President Obama signed a presidential memorandum in January of 2014 directing the Dept of Treasury to create "myRA". The memorandum states myRA to be a "a new simple, safe and affordable “starter” retirement savings account that will be initially offered through employers and will ultimately help low and moderate income Americans save for retirement". 

The proposal is that beginning in late 2014, with this retirement savings account  individuals will be able to open accounts and begin contributing to them every payday. myRAs will be initially offered through employers, balances will never go down, and there will be no fees. myRAs will hold a new retirement savings bond that will be backed by the U.S. Treasury.


The key features of myRA include: 

• No cost to open an account.
• Contribute to savings through regular payroll direct deposit.
• Individual decides how much to contribute every payday ($50, $25, $7 – any amount!)
• No fees.
• myRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.
• myRAs will not be limited to one employer  – the account will be portable.
• myRA contributions can be withdrawn tax free.
• Earnings can be withdrawn tax free after five years and the saver is 59½.
• Account holders can build savings for 30 years or until their myRA reaches $15,000 – whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs.

What Do People Think about myRA? 

According to the writers over at CNNMoney, there are people on both sides of the fence on this topic, there are those who do not want to "give a broke and bankrupt government any more money". And there are those who keep their modest savings in accounts yielding less than 1% returns, to them a 2% guaranteed return while saving for retirement is worth considering. 

 We can see that one can start small with this retirement account and that this might be a great tool for low, middle-income or part time employees to get started on the path to retirement. 

So how does myRA transition to the next step?  The total contribution to the myRA caps at $15,000. Once this happens, the balance is transferred to a Roth IRA. The balance however continues to grow tax-deferred till it is withdrawn just like any other IRA account. 

Retirement experts say that people who run their retirement calculations regularly tend to save more intelligently. And those who have a payroll deduction towards retirement are more likely to keep up with it. 

John F. Wasik, the author of "Keynes' Way to Wealth: Timeless Investment Lessons from the Great Economist, says in his article on forbes.com, that retirement security is sagging and economic inequality is partially perpetuated by this country’s fractured retirement security policy. 

Although myRA offers a good opportunity to help people save for retirement without putting a lot of pressure on the current employer-based system and more mandates on small businesses, it remains to be seen how many sign up for this and can make a meaningful dent in the retirement-savings shortfall. 

Bibliography: www.myra.treasury.gov; Keynes' Way to Wealth: Timeless Investment Lessons from the Great Economist; Center for American Progress; www.irs.gov


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.

You Have Foreign Bank Accounts? Questions Your Tax Preparer Should Be Asking!

My expression was like that of deer in the headlights when a client of ours revealed their foreign bank account balances a month after we had filed their tax returns. A long lecture about foreign account balances, and an Amended Tax Return followed with required attachments.  We quickly realized the need for the right questions in the December Tax Organizer. This was a few years ago and there have been many updates to those questions now.

Unfortunately there are many taxpayers out there who are still unaware of their filing/ reporting requirements. More details on the requirements in my post here. And many a time this is because they have not been educated of their requirements by their tax preparers. 

Due Diligence is a BIG buzz word in tax professional circles! Especially since many taxpayers unaware of their requirement to file FBARs, blame the tax preparer on whom they reasonably relied. The tax practitioner in turn relies in good faith on the information provided to them by their clients, and are not required to audit the records of the client. 

Circular 230, § 10.22 lays out the level of due diligence required to be exercised by Practitioners (Attorneys, CPA s, Enrolled Agents or Enrolled Actuaries): 

• (a) In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; 
• (b) In determining the correctness of oral or written representations made by him to the Department of the Treasury; and 
• (c) In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the Internal Revenue Service. 

In addition to the above, a tax practitioner is also required by Circular 230, § 10.34 to not ignore the implications of any information provided. The tax professional should also advise the taxpayer of any potential penalties of non-compliance. 

If the tax practitioner determines that there is a foreign bank account to report on Schedule B, he is not obligated to prepare the FBAR form for the client. He can do so only if he feels competent and the client has agreed to this additional service. 

Notwithstanding the above lack of obligation to prepare the FBAR, the practitioner does have an obligation to advise the client of the need to file the FBAR form and the consequences of failing to do so. 

So What Questions Should Your Tax Preparer Be Asking You About Your Foreign Accounts?: 

1. Do you own accounts in countries other than the United States? Do you have a signatory authority over them either in your name or as a joint/ secondary holder?
2. What are the nature of the bank accounts and how much are the balances therein. 
3. Have you reported these accounts every year? 
4. Did you have income from these accounts? If yes, has the income been included on the tax return? 
5. How have you answered the question on Schedule B of Form 1040, Part III, Line 7a? 
6. If thresholds were met, was FinCEN Form 114, Report of Foreign Bank & Financial Accounts aka FBAR filed? (FinCEN Form 114 was known as TD F 90-22.1)
7. If thresholds were met, was Form 8938, Statement of Specified Foreign Financial Assets, filed with the tax return? 
8. Are you a beneficiary of a foreign trust? If so what is the nature of the relationship? Have you received a distribution? 
9. Do you own stock in foreign companies or partnerships? If so what percentage of the total is it?
10. Are you a participant in a foreign retirement plan? 
11. Do you have mutual funds, insurance policies in foreign countries? 

With a heightened availability of information to the Internal Revenue Service about foreign bank accounts through many Inter-Government Agreements, tax payers who have accounts in foreign banks or other such instruments should make sure their tax practitioners are asking the above questions. 

Know Your Responsibility:  If you are one of those reading this blog and have undisclosed foreign bank accounts, I cannot assert enough how important it is for you to come forward voluntarily with disclosure. The Internal Revenue Service's 2014 Offshore Voluntary Disclosure Program (OVDP) is still open. If the IRS contacts you about these accounts then you will be subject to heavy fines & penalties and you will no longer have the chance to file under the OVDP. 

Bibliography: Circular 230; FinCEN From 114; Form 8938; FBAR FAQs from www.irs.gov

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.