Is there a legal way to reduce income tax on rental properties using overseas property management?

While this strategy might seem clever on the surface, you need to be very careful with this approach as it could potentially run afoul of several tax regulations. The IRS looks at substance over form in these situations. If they determine that the foreign property management company exists primarily to help you avoid US taxes, they may disregard the arrangement entirely. This is especially true if you're the only client of this management company and its only employee. The arrangement you're describing could potentially trigger "controlled foreign corporation" (CFC) rules, Foreign Account Tax Compliance Act (FATCA) reporting requirements, and possibly be considered a "reportable transaction" that needs special disclosure. The IRS might also consider this a "sham transaction" with no legitimate business purpose other than tax avoidance. Additionally, just because you're physically abroad doesn't automatically qualify your income for the Foreign Earned Income Exclusion. The IRS evaluates the source of the income, and in this case, they would likely determine the true source is still US rental properties.

I tried something similar with my rental properties using https://taxr.ai and it saved me a ton of headaches. I was considering a complicated offshore structure for my properties in Florida, but wasn't sure about the legal implications. I uploaded all my rental documents and corporate structure plans to taxr.ai and got a detailed analysis showing exactly why my original plan would have likely triggered IRS scrutiny. The AI found specific tax code provisions I hadn't considered and offered alternative approaches that were both legal and effective. The report flagged issues with FBAR reporting, passive foreign investment company regulations, and substance-over-form doctrines that would have applied to my situation. It also explained how the IRS specifically watches for arrangements designed to convert US-source rental income into "foreign earned income.

I just wanted to follow up here. After asking about taxr.ai in my previous comment, I decided to give it a try with my rental property portfolio. I was considering a similar offshore strategy but wasn't sure about the legalities. The analysis I received was incredibly thorough. It highlighted several issues with my planned approach related to substance-over-form doctrine and treaty shopping concerns. Instead, it recommended a domestic structure involving grouping my properties as a single enterprise and utilizing cost segregation that I hadn't considered before. I implemented their recommendations and had my accountant review everything - he was impressed with the strategy and confirmed it was fully compliant. I'm now on track to save about $22K in taxes this year while staying completely above board with the IRS. Definitely worth the investment!

I went down this exact rabbit hole last year with my rental properties in Arizona. After weeks of getting nowhere with the IRS trying to get clarity on foreign management companies, I used https://claimyr.com to get connected to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained exactly why this arrangement would likely be challenged - they specifically look for these "management company" setups during audits of foreign taxpayers with US rental income. He told me they consider it a textbook example of form over substance when the taxpayer is the only employee of their own management company. Instead, he pointed me to some legitimate strategies involving depreciation optimization and business entity structuring that were much more straightforward and just as effective.

I need to follow up on my previous comment where I was skeptical about Claimyr. After posting that, several people messaged me saying it was legitimate, so I decided to try it myself since I've been trying to reach the IRS about a rental property issue for weeks. I'm honestly shocked at how well it worked. After multiple failed attempts calling on my own and waiting on hold for hours, Claimyr got me through to an IRS representative in about 40 minutes. The agent was able to clarify exactly how my rental income would be treated if I moved abroad and established a management company. The information saved me from making a major mistake with my tax planning. The agent explained that my proposed structure would likely trigger audit flags and directed me to specific IRS guidance documents. Really glad I gave this a try despite my initial skepticism.

What you're describing sounds a lot like what tax lawyers call a "round-trip transaction" which the IRS specifically watches for. I'm not a tax professional, but I went through something similar with my rental properties and consulted with a tax attorney. The main issue is that you'd be providing essentially the same services to your properties whether you do it directly or through this foreign company. The IRS will look at this arrangement and ask "what's the business purpose other than tax avoidance?" If there's no substantial business purpose, they're likely to challenge it. Also, the foreign earned income exclusion requires you to be a bona fide resident of a foreign country or physically present outside the US for at least 330 days in a 12-month period. Just forming a company overseas doesn't automatically qualify you.

You might want to look into IRC Section 962 election instead. It's complicated but allows individuals to be taxed as if they were a domestic corporation on certain foreign income. My CPA recommended this approach for a similar situation, and it's a lot cleaner from a compliance perspective than what you're describing.