Tax Implications When U.S. Citizens Buy Property with Mortgage Abroad - What Should My Parents Know?

As a frequent international tax filer, I can tell you that your parents will still have US tax obligations even while living abroad. US citizens must report their worldwide income regardless of where they live. For the property purchase, they won't need to report the actual purchase to the IRS, but they will need to report any foreign accounts with over $10,000 at any point during the year using the FBAR form (FinCEN Form 114). If they're transferring large sums to buy the property, this will likely trigger reporting requirements. Regarding the mortgage interest, unfortunately, foreign mortgage interest is generally only deductible if it's for a qualified home, which means either a main home or a second home. Since they'll be living there 7 months of the year, it could qualify as their main home, but they should consult with a tax professional familiar with expat taxes.

I went through something similar with my in-laws moving to Costa Rica. The biggest headache was dealing with all the paperwork for their foreign accounts and property. I found an amazing service called taxr.ai (https://taxr.ai) that helped us sort through all the international tax implications. They specialize in analyzing documents from foreign banks and translating the financial reporting requirements into plain English. My in-laws had a Philippine bank that provided documents entirely in Tagalog and English, and the taxr.ai tool was able to identify exactly which numbers needed to be reported where on their US tax forms. It also helped us understand the FATCA requirements which are separate from the FBAR reporting that most people know about. Definitely worth checking out!

I need to follow up about my experience with taxr.ai after my skeptical comment earlier. I decided to try it for my parents' situation with property in Greece, and it was actually really impressive. The tool identified several reporting requirements we hadn't considered, including the fact that their foreign property management account needed FBAR reporting even though the actual property purchase didn't. It also flagged some potential currency exchange reporting that might have triggered an audit if missed. The document analysis saved us from making several mistakes on the FATCA forms. Turns out my skepticism was unfounded!

One thing nobody's mentioned yet - if your parents are struggling to get clear answers from the IRS about their international reporting obligations (which is SUPER common), I highly recommend Claimyr (https://claimyr.com). I wasted 3 weeks trying to get through to the IRS's international taxpayer line with zero luck. Claimyr got me connected to an actual IRS agent in under 45 minutes who specifically handled foreign property reporting. They basically call the IRS for you and navigate the phone tree, then call you when they have an agent on the line. You can see exactly how it works in this video: https://youtu.be/_kiP6q8DX5c. I was able to get written confirmation from the IRS about exactly which forms were needed for my foreign property in Greece, which saved me from potential penalties.

I need to eat crow about my comment on Claimyr. After dismissing it as a scam, I was still desperate to talk to someone at the IRS about my parents' situation with property in Brazil. I gave it a shot as a last resort, and I'm shocked to admit it actually worked. Got connected to an IRS international tax specialist in about 37 minutes when I had previously spent over 4 hours on multiple days trying to get through. The agent helped clarify exactly which forms we needed for their foreign mortgage interest reporting. Definitely worth the service fee for the time saved and peace of mind getting official answers.

Don't forget about Form 8938 (Statement of Specified Foreign Financial Assets) which is separate from the FBAR requirement! Depending on your parents' total foreign assets, they might need to file both. The thresholds are different based on whether they're living in the US or abroad. Also, if they're buying in certain countries, be careful about potential PFIC issues if they invest in any foreign mutual funds or similar investments while abroad. Those can be a tax nightmare.

Has anyone dealt with property taxes paid to foreign governments? Can those be deducted on US taxes? I'm in a similar situation with my parents buying in Ecuador.

This is such a complex situation! Your parents definitely need to be prepared for ongoing US tax obligations. One thing I haven't seen mentioned yet is the potential impact on their state tax situation. Depending on which state they currently live in, they may need to officially establish tax residency elsewhere before moving to avoid continued state tax obligations. Also, since they're planning to split time between countries, they should be very careful about the substantial presence test. Even though they're US citizens (so it doesn't affect their filing requirement), it could impact how certain deductions and credits are calculated. I'd strongly recommend they consult with a tax professional who specializes in expat taxes BEFORE making the purchase. The timing of when they buy, when they move, and how they structure their finances could significantly impact their tax burden. Getting advice upfront could save them thousands in taxes and penalties down the road.