Tax implications for International Rental

[Evan615]

Hi everyone!  My wife and I are building a home in her home country of Costa Rica.  We plan to live there one day (currently living in US), but will rent it out in the meantime.  Does anyone know of some of the tax implications for foreign rentals?  Specifically, what can be written off (maintenance vs. purchases for the home vs. construction).  I have not been able to find a reasonably priced tax professional who knows international tax law, and I am trying to plan when and how I will make certain trips and purchases for the home.  Any tips and tricks you can provider would be greatly appreciated!

Thanks in advance for the help!

[Brian2036]

@Evan615 

My wife and I own a condo in Panama which we rent out. (My wife is a Panamanian citizen.)

If you are talking about US income tax, the IRS most certainly does expect you to declare all income earned abroad although currently I’m not sure how they would know.

 I know other people who don’t declare it but we do. Most scrupulously.

It’s absurdly easy to cancel out all income with expenses. You write off every penny you spend on it, naturally, but the best part is that if you find it necessary to go there to “check on your property” from time to time, all expenses connected with your trips are also legitimate expenses! (Meaning tax deductible vacations.)

I don’t know anything about Costa Rica income tax but I doubt that it’s a significant issue. You should probably check with a tax attorney when you are there.

[Evan615]

Thanks for the info, Brian!  Do you have a property manager in Panama that takes care of the house?  If so, do you need to setup an LLC for the house?

Thanks!

[Brian2036]

@Evan615 

We do have an LLC which includes income from all our rental property. My wife is employed by the LLC and is paid a salary plus benefits so that she is then privileged to pay US taxes, Social Insecurity, and Medicare.

Whether or not this is a good investment remains to be seen but it may be helpful when she applies for a permanent resident visa.

As for property management, that is a problem in David, Panama. The Canadian who supposedly “manages” other condos in our complex is a lazy, dishonest, abusive jerk.

He has been caught renting out vacant units and “forgetting” to notify or pay the owners, but some people continue to employ him for fear of getting someone worse.

If you are in a resort community you might find someone reliable but as you might imagine there are plenty of thieves and con-artists out there waiting for you.

 We have excellent long-term expat American tenants in place who self-manage for the most part. We are also fortunate to have a son-in-law nearby who is a building contractor.

You might check out Expat Exchange on the internet. It is a forum for people who are expats in various countries around the world, and for those who are interested in emigrating.

You can get some good input from local residents there.

[Mike-And-Jane0]

@Brian2036 Good to hear you are managing to avoid taxes. It always amazes me when people don't report incomes (hence evading tax) when, in many circumstances, it is perfectly legal to claim enough expenses etc. to avoid paying tax.

[Barrett32]

@Brian2036 hey not sure if you still follow this-- we bought place in Panama too and set up a US LLC for the taxes etc. But do you know anything about the liability in Panama ? like does Panama need it's own LLC- I also married a Panamanian 

[Sarah977]

@Evan615  The best thing will be for you to consult an accountant in Costa Rica who is conversant with tax regulations for short term rentals. Maybe connect with some other Costa Rican hosts for accountant recommendations.

I know in Mexico you can only deduct expenses for which you receive official facturas, not counter receipts. 

You will have to pay taxes on the rentals in both Costa Rica and the US, and I don't know if there is a tax treaty between Costa Rica and the US -that's something you can easily research online yourself. If there is a tax treaty,  you can't double taxed. That means, if, for instance, you have to pay 10% tax on your rental in Costa Rica, but are in a 20% tax bracket in the US, you would have to pay 10% tax on your US taxes.

[Evan615]

Thanks for the reply, Sarah!  Did you work with an accountant in the US as well?  If so, how did you find someone?  I am struggling to find any accountant who works with international taxes.

Thanks!

[Sarah977]

@Evan615  I'm Canadian, not American, and I live in Mexico, although I do file taxes in Canada as well.

Even if you find a US accountant who is well versed in international tax law, all they can do is know how to incorporate and report your Costa Rican income when filing your US taxes. They wouldn't know the Costa Rican tax regs nor be able to file your Costa Rican taxes.

I  have a Mexican accountant who handles my Mexican taxes and a Canadian accountant who handles my Canadian taxes. 

Any competent accountant in the US should know how to deal with foreign income or be able to find out. You aren't running some huge international company with offices all over the world, you're just reporting income from a rental house in Costa Rica. Don't overthink this.

[Debra300]

@Evan615,

When we file our US taxes declare the income earned, mortgage interest, renovation costs and capital expenditures that is incurred on our St. Lucia guesthouse.  Thus far, these items have canceled out the earnings, and our tax contribution hasn't changed in comparison to before claiming the foreign income and expenses.  You need to speak with or perform research on foreign income declaration, and not try to rely upon a group of people on a blog.  If you were ever to be audited, would you tell the IRS that you followed the tax filing recommendation of the folks on the Airbnb Community Center?