Owning Foreign Real Estate 2025:
What to Know (Part II)
Picking up from Part I of this article, owning foreign real estate can feel like living the dream—but for U.S. citizens, owning foreign real estate also brings an extra layer of responsibility: reporting. Even if the property doesn’t earn income, it might still trigger IRS forms, tax rules, and stiff penalties if you miss something.
Understanding what needs to be reported—and when—is just as important as picking the right beachfront villa or mountain cabin.
Here’s what every U.S. buyer should know.
Information Reporting: More Than Just Taxes
When Americans buy property overseas, they often assume they only need to worry about paying taxes if the home earns income. But that’s not the full picture.
The U.S. government requires its citizens and residents to report foreign financial assets—even when those assets don’t generate income. This includes things like foreign bank accounts, foreign trusts, and ownership in foreign entities that might hold real estate. And these forms aren’t optional. If you don’t file them, you could face fines in the thousands—or even tens of thousands—of dollars.
Let’s break this down into layman’s terms.
Do You Have to Report the Property Itself?
If you own a foreign home strictly for personal use and hold it in your own name, you likely don’t need to report the property itself on U.S. tax forms.
But—and it’s a BIG “but”—if:
- You own the home through a foreign company or trust
- You share ownership with others
- The property generates income (like Airbnb rentals)
- You opened a foreign bank account to pay bills or taxes related to the home
…then you may be required to report those details to the IRS each year.
Even an escrow account used during the purchase or sale of the home might need to be reported.
Common Forms You Might Need to File
Here are some of the most common U.S. information reporting forms connected to foreign real estate:
- FBAR (Foreign Bank Account Report):
If the combined total in your foreign financial accounts goes over $10,000 at any time during the year, you must report all of those accounts—even if only one day passes over the limit. This often happens when paying for a home, funding renovations, or receiving sale proceeds. - Form 3520 and 3520-A:
These forms are used when dealing with foreign trusts. If your property is held in a structure that the IRS treats as a trust—even if the foreign country doesn’t—you’ll likely need to file. - Forms 8858, 8865, 5471, and 8832:
If your property is owned through a foreign business entity (like a foreign LLC or partnership), these forms might apply. Choosing the wrong entity type without U.S. tax advice can lead to reporting headaches and potential double taxation.
Penalties: What Happens If You Don’t File
This isn’t something you want to ignore. Failing to file these forms can lead to steep penalties:
- $10,000 or more per missed form
- Up to 35% of the value of the asset in some cases
- And if the IRS believes you deliberately avoided reporting, the penalties could be even higher
That’s why it’s so important to work with a tax professional experienced in international matters—ideally, someone familiar with both U.S. tax law and the country where the property is located.
Gift and Estate Taxes: Plan Ahead for Inheritance
Foreign property also needs to be factored into your estate plan. U.S. gift and estate taxes apply to all your assets worldwide, not just those inside the United States. That includes your overseas condo, farm, or apartment.
- S. citizens and permanent residents are taxed on global assets at death
- The current federal estate tax rate is 40%
- The exemption is high ($13.99 million in 2025), but that amount could drop in future years
Some foreign countries also charge inheritance or estate taxes, and tax treaties may provide some relief—but only if there’s a true overlap between the taxes. For example, if you owe estate tax in the U.K., and also in the U.S., you might not get a credit for both unless the timing and structure align.
Choosing How to Own the Property
How you hold title to your foreign property matters—a lot.
A structure that works well in the U.S. (like an LLC or revocable trust) might backfire abroad. For example:
- A S. revocable trust might not be recognized overseas, or worse, treated as a foreign trust subject to heavy reporting and taxes.
- A S. LLC might be a pass-through entity here but taxed like a full corporation there, meaning you could end up paying more than necessary.
- Even joint ownership, which usually avoids probate in the U.S., might not have the same effect abroad.
In many cases, the simplest solution—individual ownership or a common local structure—is the best. But always check with local legal and tax experts before making a final decision.
Estate Planning Across Borders
Don’t assume your U.S. will covers everything. Some countries have forced heirship rules, which require a certain portion of your estate to go to children or a spouse, regardless of what your U.S. will says.
In some cases, the best way to handle this is to create a separate local will just for the foreign property—but it must be carefully coordinated with your U.S. estate plan to avoid conflicts.
A good estate plan should ensure:
- Your property passes as you wish
- Your heirs aren’t hit with unnecessary taxes
- You avoid probate delays in multiple countries
Final Thoughts on Owning Foreign Real Estate
Owning foreign real estate can be a rewarding adventure—but it also means stepping into a more complex legal and tax world.
To avoid costly surprises:
- Hire experienced local counsel to guide your real estate transaction
- Work with U.S. tax professionals who understand foreign reporting rules
- Plan your ownership and estate strategy early—before buying the property
- Stay compliant with U.S. tax filings, even when the property isn’t making money
With the right guidance, you can enjoy your piece of paradise without losing sleep over the paperwork. Our managing attorney, Margaret, is licensed in Arizona, California and the U.K. She has extensive knowledge on international estate planning. We are here to help or see if we can point you in the right direction. Call us Monday-Thursday (480) 525-6244 or email us.
