U.S. TAX GUIDE IN BRAZIL
Do I need to report rental income from my Brazilian property to the IRS?
Yes, you do. As a US citizen or green card holder, the IRS requires you to report all income, including any rental income from properties you own in Brazil.
It doesn’t matter if the property is rented out full-time or just occasionally through platforms like Airbnb—any income generated needs to be reported.
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How do I report this rental income?
You’ll report your rental income on Form 1040 using Schedule E. This is where you detail the income and expenses related to your property.
Expenses can include things like property management fees, repairs, utilities, and depreciation, which is an annual deduction that accounts for the property’s wear and tear over time.
What if I’ve already paid taxes in Brazil on this rental income?
If you’ve paid taxes in Brazil on your rental income, you can usually claim a Foreign Tax Credit (FTC) on your US tax return using Form 1116. This credit helps to avoid double taxation, ensuring that you’re not taxed twice on the same income by both Brazil and the US.
What happens if my expenses exceed my rental income?
If your expenses are greater than your rental income, you have a net loss.
You can use this loss to offset other income on your tax return, potentially lowering your overall tax liability. If the loss exceeds your income for the year, you can carry it forward to offset income in future years.
What forms are required for reporting foreign rental income?
Besides Form 1040 and Schedule E, if your rental property is generating income outside the US, you also need to file Form 8858.
This form is specifically for reporting foreign income and ensures that the IRS has a clear record of your earnings from properties like your Brazilian rental.
Why is Form 8858 important?
Form 8858 is important because it keeps your foreign income in compliance with US tax laws. Not filing this form—or filing it late—can lead to significant penalties, sometimes as much as US$10,000 per year.
Can you offset rental losses from a Brazilian property against other US income?
Yes, you can. If your rental property in Brazil is generating losses—meaning your expenses are higher than the income you’re making from it—you can use those losses to reduce your other income on your US tax return.
When you report your rental income and expenses on Schedule E (Form 1040), any net loss from your Brazilian property can be used to offset other income, such as your salary or investment income.
However, there are some important rules to keep in mind:
- Passive Activity Loss Rules: Rental income is generally considered passive income unless you qualify as a real estate professional.
This means that rental losses can usually only be used to offset other passive income. If your losses are more than your passive income, you may need to carry the extra losses forward to future years. - US$25,000 Special Allowance: If your modified adjusted gross income (MAGI) is US$100,000 or less, you might be able to offset up to US$25,000 of your other income with rental losses. This allowance starts to phase out if your MAGI is more than US$100,000 and disappears completely at US$150,000.
- Currency Conversion: Since your income and expenses are in Brazilian Reais, you’ll need to convert these amounts to US dollars using the appropriate exchange rate. This can affect the exact amount of your loss.
Are there special rules for reporting Airbnb or short-term rental income from Brazil?
Yes, there are special rules to follow if you’re earning income from Airbnb or other short-term rentals in Brazil.
The IRS treats income from short-term rentals differently from long-term rentals, and how you report this income depends on a few factors.
- Rental vs. Business Income: If you rent out your property for less than 15 days in a year, you don’t have to report the income to the IRS. But if you rent it out for more than 15 days, the income must be reported. Depending on the services you offer to guests, this income could be classified as rental income (reported on Schedule E) or business income (reported on Schedule C). For example, if you provide services like daily cleaning, meals, or guided tours, your rental activity might be considered a business.
- Deducting Expenses: Just like with long-term rentals, you can deduct expenses related to maintaining and managing the property, such as cleaning costs, utilities, and depreciation. If you use the property personally for part of the year, you’ll need to split these expenses between personal use and rental use.
- Foreign Income and Tax Credits: Since your property is in Brazil, you may need to pay taxes on this income to the Brazilian government. To avoid being taxed twice, you can claim a Foreign Tax Credit on your US taxes, but you’ll need to keep detailed records of the taxes you paid in Brazil.
- Local Regulations: Make sure to comply with any local Brazilian laws regarding short-term rentals, such as registration requirements, local taxes, and licenses. Not following these rules could lead to fines or penalties, which could also affect your US tax situation.
Do you need to file Form 8858 if you already report rental income on Schedule E?
It depends. If you own your Brazilian property through a foreign company that’s treated as a disregarded entity for US tax purposes, you might need to file Form 8858 in addition to reporting your rental income on Schedule E.
