US Tax on Foreign Rental Income (Schedule E, FBAR, FX & Depreciation Explained)

Foreign Rental Income On A US Return

The flat you kept in London or Dublin when you moved to the United States is generating rental income. That income is taxable in the United States, on a US calendar year, in US dollars, and the way you have been reporting it may not match how the IRS expects to see it.

This article explains how the US taxes foreign rental income received by a US tax resident: the Schedule E starting point, where US rules differ from home-country rules on mortgage interest and depreciation, how currency translation affects the reported numbers, the Foreign Tax Credit and passive-loss framework, FBAR and Form 8938 reporting of the rental bank account, and the interaction with eventual sale.

The Starting Rule: Schedule E, US Calendar Year, US Dollars

The starting rule for a US tax resident is simple, if uncomfortable: worldwide income is reportable. Rental income from a home-country property is included on Schedule E of Form 1040 alongside any US rental income. There is no carve-out for a flat in London or Dublin on the basis that it sits outside the United States.

The reporting period is the US calendar year, even where the home-country tax year is different. UK tax years run 6April to 5 April. Irish and continental European tax years are typically the calendar year, which aligns more cleanly. Switzerland's cantonal systems vary. The US return asks for the calendar-year figures, translated into US dollars, regardless of how the home country presents the same property.

The reported figure is gross rent received, less allowable expenses. The mechanics of that calculation, specifically, which expenses are allowable and how much of each, is where the US return most often diverges from a home-country equivalent.

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Where US Expense Rules Differ From Home-country Rules

US rules on deductible rental expenses do not mirror home-country rules, and the differences can be significant.

Mortgage interest is a common divergence. The UK restricts mortgage interest relief on residential lets to a 20% tax credit rather than a full deduction, a rule phased in over several years. The US return is unaffected by that restriction, the full mortgage interest on the foreign property is generally allowable on Schedule E, subject to the US rules on what qualifies as interest and on the treatment of points and finance fees. A US return can therefore show more interest expense than the same property's UK return shows as deductible.

Depreciation is another. US tax law requires residential rental property to be depreciated on a straight-line basis over a statutory life. Under current rules, foreign residential rental property is depreciated over 30 years, longer than the 27.5 years used for US residential property. The depreciation is not optional: the IRS treats the allowable depreciation as taken whether the taxpayer actually claims it or not, and recaptures the notionally-allowed amount on eventual sale. Home countries typically do not require depreciation of residential rental property at all. In plain English, the US return reduces taxable rental income each year through depreciation that the home-country return simply does not.

Other categories diverge in smaller but cumulative ways, repairs versus capital improvements are drawn differently under US rules, travel costs to manage the property are allowed within specific limits, and legal and management fees are deductible on generally similar lines.

Currency Translation and the Phantom Gain/loss Problem

All figures on the US return are in US dollars. That sounds mechanical, but the translation rules can produce numbers that do not match the taxpayer's intuition about the property.

Rental income can be translated at the spot rate on each payment date, or, more commonly in practice, at an annual average rate that the IRS and Treasury make available. Expenses follow the same convention, applied consistently. Where the home currency weakens or strengthens materially against the dollar in a given year, the reported US-dollar income and expense figures shift even where the local-currency activity has not.

What I see most often is a taxpayer who can point to a UK or Irish tax return showing roughly the same net rental result each year, and then finds that the US return shows meaningful swings because the FX rate moved. This is not an error. It is how the rule works.

The Foreign Tax Credit and the Passive-loss Limit

Home-country tax paid on the same rental income typically generates a US Foreign Tax Credit on Form 1116. The credit sits in the "passive" separate limitation category for rental income, and the usable credit in any year is capped at the US tax on the foreign-source portion of the passive income. Unused credits can be carried back one year and forward ten, within the same category.

The practical consequence is familiar: home-country rental tax rarely fully offsets the US tax on the same income, because the US depreciation deduction has reduced the US taxable income, which in turn reduces the credit ceiling. The arithmetic of the credit limit is the reason two properly-prepared returns on the same property can produce a meaningful residual US tax.

Passive activity loss rules are the other significant US-side overlay. Rental income is passive by default. Losses from a passive activity can generally be used only against other passive income, not against US wages or other active income. Where the foreign rental shows a US loss in a year, the loss is typically suspended, carried forward, and release don eventual sale of the property or against future passive income. There are narrow active-participation and real-estate-professional exceptions, but they do not apply to most expat taxpayers holding a single overseas flat.

FBAR, Form 8938, and What Happens When You Sell

The rental-linked bank account introduce sits own reporting layer. Where the foreign account holds the rental deposits and pays the property expenses, it is subject to FBAR if the aggregate of the taxpayer's foreign financial accounts exceeds $10,000 at any point in the year. Form 8938 reporting may also apply if the taxpayer is above the thresholds for specified foreign financial assets. Both are information reports, not additional taxes.

On eventual sale of the property, the rental years follow the taxpayer into the gain calculation. Depreciation taken(or deemed to have been taken) is recaptured, taxed at ordinary rates up to 25%on the straight-line amount. The remaining gain is capital. The foreign taxpaid on the home-country sale can generate a Foreign Tax Credit on the US return, again subject to separate-limitation category rules. The relevant US tax treaty may also shift the primary taxing right between the two countries, particularly on real property.

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Country Comparison: UK, Ireland, Switzerland and Germany

Comparative summary of how a US tax resident's Schedule E calculation typically interacts with four common home-country rental regimes. This table is educational, not exhaustive, and country-level rules change from time to time, the relevant tax authority publications and the US tax treaty with the country are the authoritative source.

Source: Skybound 2026

Questions To Raise With A Qualified Adviser

For an expat in the US receiving rental income from a home-country property, a short list of questions to raise with a qualified cross-border tax preparer includes:

• Is my US Schedule E calculation using US expense rules, not home-country rules, particularly on mortgage interest and depreciation?
• Have I been depreciating the foreign property on a 30-year straight-line basis, from the date I became a US tax resident?
• Am I translating income and expenses using a defensible exchange-rate convention, consistently applied year to year?
• Is the home-country tax on the rental generating a usable Foreign Tax Credit on Form 1116 in the passive category?
• Are any foreign rental losses suspended under the passive activity rules, and am I tracking them for release on eventual sale?
• Is the rental-linked bank account picked up on FBAR and, if applicable, Form 8938?
• If I eventually sell, what does the depreciation recapture look like, and does the relevant US tax treaty change the calculation?

Foreign rental income is one of the most common areas of quiet non-compliance among expats in the US. The rule itself is not complicated, worldwide income, Schedule E, US dollars, but the details of expense treatment, depreciation, currency translation, credit mechanics, and eventual sale are where well-intentioned returns drift out of alignment with what the IRS expects. It is usually much easier to align the reporting while the property is still being held than to untangle years of divergence at sale.