Can we claim international property deduction on US taxes? Foreign real estate tax rules?

Thanks for the detailed answer. If I rent it out for like 2 months per year but use it personally the rest of the time, how exactly does the expense allocation work? Like do I just multiply everything by 2/12 to get the deductible portion? Also, is there a minimum amount of rental income needed before I have to report it?

For rental allocation, you'd generally divide based on days - so if you rent 60 days and use personally 305 days, you'd allocate about 16.4% of expenses to rental (60/365). You can only deduct expenses up to the amount of rental income unless you qualify as a real estate professional. There's no minimum threshold for reporting rental income - the IRS requires you to report all income regardless of amount. Even if you rent it for just a few days, that income needs to be reported on Schedule E. Just be aware that if you rent for 14 days or less per year, it's considered a "de minimis" rental and you don't have to report the income (but then you can't deduct any expenses either).

How does taxr.ai actually work? Do they connect you with real tax professionals or is it just an algorithm? My situation with my property in Thailand is pretty complicated with partial rental and some business use when I'm there.

I've seen a lot of these "AI tax" services pop up lately. Do they actually understand international tax treaties? My condo in Portugal is subject to specific US-Portugal tax agreements and I'm worried about getting incorrect advice.

They use a combination of AI and tax professionals who review your specific situation. You upload your tax documents and property information, and they analyze everything including international tax agreements. Their system is trained on all the current tax treaties so it's aware of country-specific rules. For your situation in Thailand, they'd help with the mixed-use allocation between rental and business use, which gets complicated but can maximize your legitimate deductions. They've handled cases similar to yours where proper classification makes a huge difference in tax liability.

Wait, how does this actually work? Is this legit? I thought nothing could get you through to the IRS faster. They've got a phone system that's basically designed to make you give up.

This sounds like a scam honestly. No way some random service can magically get through to the IRS when millions of people can't. And even if they did get through, why would you trust them with your personal info? The IRS probably wouldn't even talk to them about your specific case anyway due to privacy rules.

It's definitely legitimate - they don't actually talk to the IRS for you. They navigate the phone system and wait on hold, then when they reach a human, they connect you directly to that agent. You do all the talking yourself, so there's no privacy issue. They use technology to continuously dial and navigate the phone tree until they get through. They're basically just handling the frustrating hold time for you, which can be hours. Once they get a person, they call you and connect you directly to that IRS agent. You handle the conversation yourself, so all your information stays private.

Do you know if there's a max value for the foreign mortgage interest deduction? My place in Japan has a pretty sizable mortgage (equivalent to about $450k USD). Also, do you have to use the exchange rate from the date of each payment or can you use an average for the year?

The mortgage interest deduction limits apply to foreign properties too - currently that's interest on up to $750,000 of qualified residence debt ($375,000 if married filing separately). So your $450K Japanese mortgage should be fully within the limit. For currency conversion, the IRS generally wants you to use the exchange rate on the date of each payment for the most accurate reporting. However, if the rate didn't fluctuate much during the year, you can use an annual average rate if you're consistent about it. The IRS publishes yearly average rates, or you can check the Treasury's Financial Management Service for historical rates.

Yes, you need to convert to USD using the exchange rate on the date you receive the rental income. Keep detailed records of all conversions. Also, be aware that currency fluctuations between when you collect rent and when you pay expenses can create additional taxable gains or losses.

Don't forget you also need to report that rental property on Form 8938 if you meet the filing thresholds. I got hit with a penalty because I reported the income but didn't know I also needed to disclose the property itself as a foreign asset.

This is really helpful - I hadn't even thought about the FEIE implications! So if I understand correctly, if I spend more than 330 days in Costa Rica working remotely, I could potentially exclude most of my $125k income from US taxes? That seems like it could more than offset the property costs. But wouldn't that create issues with my US employer? I assume there are complications with payroll taxes, state tax obligations, and maybe even employment law if I'm technically working from another country for that long. Also, how does the 330-day test work exactly - is it calendar days or work days? Like if I'm there 11 months but take a two-week vacation back to the US, does that reset the clock somehow? The Costa Rica tax residency piece is concerning too. Do you know if their tax rates are generally higher or lower than US rates for someone in my income bracket?

Great questions! The 330-day test is calendar days (not work days) in any 12-month period, so your two-week US vacation wouldn't reset anything - you'd still qualify if you're physically present in Costa Rica for 330+ days total. But you're absolutely right about the employer complications. Most US employers have policies against international remote work due to payroll tax, employment law, and data security issues. You'd likely need explicit approval and might face complications with state unemployment insurance, workers' comp, etc. Some people work around this by not telling their employer, but that's risky. Costa Rica's tax rates for your income level are generally lower than US rates - their top marginal rate is around 25% and doesn't kick in until higher income levels. Plus they have a territorial tax system, so foreign-sourced income (like your US salary) may not be taxable there depending on how it's structured. The FEIE could indeed save you substantial money, but it comes with trade-offs: you lose the ability to contribute to Roth IRAs, and you need to be very careful about the timing of your US visits to maintain qualification. Also consider that excluding income means you can't claim certain US tax credits that require earned income. Definitely worth modeling out the full scenario with a tax professional who understands both countries' systems!

This is really important information about depreciation recapture that I definitely wouldn't have considered! So basically, every year I take depreciation deductions, I'm creating future tax liability when I sell - and I can't defer it like with US property exchanges. Quick question - when you mention tracking the basis in both USD and colones, how does that work practically? Do I need to convert the original purchase price to colones at the time of purchase and then track improvements in both currencies? And when I sell, which exchange rate do I use to calculate the gain/loss - the rate from when I bought it or when I sell it? Also, is there any way to minimize the depreciation recapture hit? Like if I convert it back to purely personal use for a period before selling, does that help at all? Or once you've claimed rental depreciation, you're locked into that tax treatment?

Great questions about the currency tracking! You'll need to establish your basis in USD at purchase using the exchange rate on the closing date, then track any improvements in USD using the exchange rate when you make those improvements. The IRS requires all basis calculations in USD regardless of what currency you actually paid in. When you sell, you use the exchange rate on the sale date to convert the sales proceeds to USD, then calculate your gain/loss against your USD basis. This can create currency gains/losses separate from the property appreciation. Unfortunately, converting back to personal use doesn't eliminate depreciation recapture - once you've claimed it, the IRS will recapture it upon sale regardless of current use. The only way to minimize it is to not claim depreciation in the first place (though the IRS will treat you as having claimed it anyway under the "allowed or allowable" rule). One strategy some people use is to hold the property until death, since inherited property gets a stepped-up basis that eliminates the depreciation recapture liability. But that obviously requires very long-term planning! The key is to factor the eventual recapture tax into your overall investment analysis when deciding whether the rental income and current-year deductions make financial sense.

This is such a great point about state tax implications that I hadn't considered! I'm currently in California, so this could be huge for my situation. Does anyone know how California specifically handles this? I've heard they're pretty aggressive about going after people who try to claim non-residency. If I'm spending 8-10 months in Costa Rica but still have my apartment lease and bank accounts in CA, would that make me still a CA resident for tax purposes? Also wondering about the practical side - if I do establish non-residency in California, do I need to become a resident somewhere else, or can I just be a "nowhere" person for state tax purposes? And how does that work with things like voter registration and driver's license? The potential savings on CA state income tax could definitely help offset some of the costs and complications of the foreign property purchase!