U.S. TAX GUIDE IN MEXICO
Do I have to report rental income from a property in Mexico to the IRS?
Yes, you have to report rental income from a property in Mexico to the IRS. All rental income, whether it’s from a long-term tenant or through platforms like Airbnb, must be reported on your US tax return.
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How do I report rental income to the IRS?
To report rental income, you start with the gross rental income received from the property. You then subtract any expenses associated with the rental property.
If the result is a net income, it gets taxed on your US tax return. If it’s a net loss, you can either benefit from the loss in the current year or carry it forward to offset future years’ income.
Does the ownership structure of the rental property affect reporting?
Yes, the ownership structure affects how you report the income. If you own the property jointly with a spouse, you need to consider whether you are filing jointly or separately and whether your spouse is a US person.
Example Scenario
If you are married to a Mexican citizen with no US tax obligations and you jointly own a rental property in Mexico, you would report only your 50% share of the rental income and expenses on your US tax return.
Is rental income from a non-US property reported on Form 8858?
Yes, rental income from non-US properties needs to be reported on Form 8858.
This form must be filed along with your 1040 tax return. Form 8858 details the type of income and expenses, similar to Schedule E for rental income.
It’s important to file on time since late filing can result in significant penalties, up to US$10,000. However, if you haven’t filed Form 8858 for several years, you might be able to use the Streamlined Amnesty Program to catch up and avoid penalties.
When can a house not be considered a rental property?
A house cannot be considered a rental property under certain conditions, primarily related to the amount of personal use versus rental use.
Minimal Rental Use
If you rent out your property for fewer than 15 days during the year, the IRS does not consider it a rental property. In this case:
- Rental Income Not Reported: You do not need to report the rental income.
- Rental Expenses Not Deductible: You cannot deduct rental expenses.
Significant Personal Use
If the property is used significantly for personal purposes, it may not qualify as a rental property. The IRS considers a property to be used for personal purposes if:
- Personal Use Exceeds 14 Days: You use the property for personal purposes for more than 14 days, or
- Personal Use Exceeds 10% of Rental Days: You use the property for personal purposes for more than 10% of the total days it is rented to others at fair rental value.
Remember, when a property is not considered a rental property due to significant personal use:
You can only deduct rental expenses up to the amount of rental income reported and expenses related to personal use are not deductible.
Examples of Personal Use
- Vacations and Family Use: Time spent at the property for vacations or by family members (even if they pay rent).
- Barter Arrangements: Time spent at the property under an exchange arrangement where you stay at someone else’s property.
Here’s a table on owner’s usage vs. rental usage and tax treatment
Usage Type | Description | Tax Treatment |
100% Rental Property | Property rented out full-time, no personal use | Report all rental income on Schedule E, deduct all related expenses |
Mixed-Use Property | Property used for both personal and rental purposes | Allocate expenses between personal and rental use based on days of usage |
Minimal Rental Use | Rented out for fewer than 15 days per year | Rental income not reported, rental expenses not deductible |
What are the deductibles?
When you rent out property in Mexico, you can deduct various expenses associated with the rental activity. Here are the common deductible expenses:
- Mortgage Interest: Interest paid on the mortgage for the rental property.
- Property Taxes: Local property taxes paid to Mexican authorities.
- Insurance: Insurance premiums for the rental property.
- Repairs and Maintenance: Costs of repairs and general maintenance to keep the property in good condition.
- Utilities: Utility costs if paid by you and not reimbursed by the tenant.
- Depreciation: Annual depreciation deduction based on the property’s cost, useful life, and other factors.
- Travel Expenses: If you travel to the property for management or maintenance purposes.
- Advertising: Costs of advertising the property for rent.
- Professional Fees: Legal and professional fees related to the rental property.
- Supplies: Any supplies needed for the rental property.
Should I consult a tax professional?
Yes. By consulting a tax professional, you could use the Streamlined Amnesty Program to file the missing forms and avoid the penalties.
Here are a few more important areas to consider:
- Currency Conversion: Report all rental income and expenses in US dollars, using the appropriate exchange rates.
- Documentation: Keep detailed records of all income and expenses related to the rental property.
- FBAR and FATCA: If your rental income is deposited in a foreign bank account, you may need to file FBAR (FinCEN Form 114) and FATCA (Form 8938).
