U.S. TAX GUIDE IN INDIA
What US expats need to know about reporting Indian rental income on their tax returns.
US citizens and Green Card holders who receive rental income from Indian properties must include that income on their US tax returns. The US system taxes worldwide earnings, so even rent collected from property overseas falls under American tax rules.
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However, some expats assume that foreign income does not need to be reported, but that belief can lead to penalties and potential audits. Paying Indian taxes does not exempt individuals from filing with the IRS.
Instead, the key mechanism that prevents double taxation is the foreign tax credit.
Does paying Indian taxes remove the need to file with the IRS?
No, paying taxes in India does not eliminate the US filing requirement for that same rental income.
How does depreciation affect taxable income for foreign properties?
Depreciation on foreign residential rental properties follows a 30-year straight-line schedule under US rules.
Owners determine the building’s value (excluding the land) and divide that amount by 30 to find the annual depreciation. This figure reduces taxable rental income on the US return.
If a property’s structure is valued at US$210,000, the annual depreciation is US$7,000. Claiming this amount each year can transform a profitable rental into one that shows a small net profit or even a loss.
Though this benefit may not exist under Indian tax guidelines, it remains valid on the US return.
Depreciation must be tracked accurately because any gain from the eventual sale of the property may be subject to depreciation recapture.
What is the difference between US and Indian depreciation practices?
India’s tax system usually applies different rates and methods for depreciation, and some expats may not claim a similar allowance on their Indian tax returns. By contrast, the US system uses a fixed 30-year timeline for foreign residential rentals.
This means that a property owner reporting income to the IRS might be able to deduct depreciation each year, even though they are not taking the same approach in India.
The result is that the rental property could generate real-world cash flow but appear less profitable for US tax purposes. Over time, these deductions may lead to a lower total US tax liability.
However, owners should remember that the IRS expects consistent use of depreciation once the property is placed in service, and recapture can later adjust the final taxable gain.
Do Foreign Tax Credits protect expats from double taxation?
Yes, foreign tax credits (FTC) let expats credit taxes paid to India against their US tax bill for the same income. If an individual pays US$3,500 in Indian tax on rental earnings, they can typically apply that amount as a credit on their US return.
If the US tax on that same rental income would have been US$4,000, then the net US liability is US$500. If the Indian tax is higher than the US tax, the excess credit can often be carried forward for future use.
Although these rules do not always guarantee zero US tax, they offer a meaningful way to reduce or eliminate overlapping obligations.
Some owners might need to file Form 8858.
Form 8858 applies to certain foreign entities or branches that the IRS categorizes as disregarded entities. While most individuals reporting foreign rental income simply use Schedule E and possibly Form 1116, some ownership structures trigger the requirement for Form 8858.
Failing to submit this form when it is required can result in substantial penalties, beginning at US$10,000.
Those who hold real estate through a single-member foreign entity, or who have structured their property interests through a branch arrangement, must review whether Form 8858 applies.
If you’re still unsure, consulting a tax professional is often the safest way to confirm.
What are the risks of not reporting Indian rental income accurately?
The IRS has focused increasingly on foreign assets and income in recent years. If a property owner omits or understates rental income from India, they can face penalties, interest on overdue amounts, and even an audit that might extend to multiple past tax years.
Some may assume that property abroad is hidden from the IRS, but international data-sharing agreements and banking regulations make foreign income more visible than before.
By not reporting, owners also miss out on legitimate deductions like depreciation, repairs, or maintenance expenses.
If they later choose to sell, any undisclosed prior rental income could complicate capital gains calculations and lead to further scrutiny.
Being transparent from the start usually yields better outcomes and helps owners stay in compliance.
Can rental losses offset other US income?
Yes, if the expenses and depreciation on the property exceed the income, the result may be a net loss for US tax purposes. Such a loss can sometimes be used to reduce other taxable income, depending on passive loss limitations and adjusted gross income thresholds.
If it cannot be used immediately, the unused portion of the loss may carry forward to future tax years. For instance, if the property shows a net loss of US$4,000, that amount might decrease the owner’s overall taxable income for that year.
If the owner cannot claim it fully because of restrictions, it can remain in reserve until a future period. This benefit underscores the importance of tracking every deductible expense.