Depreciation exceeds income, do i get a refund?

Question

Hi All,

Looking for some sources or answer if available. I am currently working abroad long-term. So I am not taxed in the US on the income I earn from my job. However, I do own a rental property in the US.

I know I will have a taxable income from the rent I earn, but what if my deductibles from appreciation and expenses exceeds my earned income? Am I leaving money on the table here or would I receive a refund that accounts for this?

I am considering investing in REITs since their dividends are taxed at ordinary income, but I’m also unsure if that amount can actually be affected by deductibles.

Any information is appreciated. Thanks!

Eamonn McElroy · Answer

As Joe mentioned, if you're a US person (i.e. a US citizen or greencard holder), you're taxed on your worldwide income.  There may be some relief if the country you're a resident of has a tax treaty with the US.  Either way, most of the time it requires reporting and disclosure on your 1040 annually.

That said, if your only US income subject to taxation is US situs rental real estate, it's not likely that you'll get a refund.  In order to get a refund, you have to either have US tax withheld (or made estimate payments), or have generated refundable credits.  One doesn't get a refund merely for generating a tax loss, that's not how it works.

Regardless of whether you're a US person or a non-resident alien, it might be in your best interest to get professional help.  Cross border tax compliance isn't something I say is DIY-able.

Joe Splitrock · Answer

We really need more information to answer this question. If you are a US citizen, then you are responsible for taxes on income, even if working and living abroad. If your rental properties generate a passive loss, your income level determines whether you can claim that passive loss against W2 income. If there is no other income or your income is too high, the loss would just be a carry over loss. You could use it to offset income in future years. You really need to hire a CPA to ensure you are doing your taxes properly. My aunt has lived out of the country for 30 years and neglected to pay US taxes. She had to work out a settlement with the IRS to resolve.

Basit Siddiqi · Answer

@Charles CruseIf your rental expenses are more than your rental income, it won't add to your income and as a result you won't pay additional US tax.The same would be for the state filing.

Charles Cruse · Answer

@eammon, yes I have passed those tests to claim the FEIE. The year round statement was supposed Mean  I passed the physical presence test and residence statement was supposed to mean I’ve established my tax home in the country I am in. Apologies for not knowing the technical terms and causing confusion.

I am just curious about my US passive income while I am abroad And what rate that will be taxed. And how my depreciation and other rental expenses will affect that passive income tax-wise.

Eamonn McElroy · Answer

If you've established a tax home in a foreign country AND meet either the bona fide resident test or the physical presence test, you may claim the Foreign Earned Income Exclusion (FEIE), up to a limit.  Just because one lives in a foreign country, even year-round, doesn't automatically mean they're eligible for the FEIE.

Whether the FEIE is better than claiming Foreign Tax Credits (FTCs) is based on fact and circumstance, and should not be taken light as the FEIE is a tax election.  The FEIE vs FTCs isn't an automatic no-brainer.

Regardless, if you're claiming the FEIE you still should be reporting your foreign earned income and filing a 2555 annually.  Hopefully TurboTax has been advising you correctly and that's what you've been doing.

Charles Cruse · Answer

Hi, thank you both for your replies!

Yes I am a US citizen and am required to report my earned income. However, when using the H&R Block software, they state I’m not required to pay taxes on foreign earned income if I’ve been working outside of the US for a consecutive period of at least 12 months and have become a resident of the country I am working on. Both of which are true in my case for the year 2020.

I’ll look into this more, but thank you both very much for the responses!

Depreciation exceeds income, do i get a refund?

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