I read that foreign real estate doesn’t need to be reported on US taxes and my bank account in Portugal didn’t have much money in it last year so I definitely don’t need to file FBAR.
I just wanted to double check that the Mercan investment counts as real estate (and can thus be ignored on my taxes) as opposed to investment into a foreign company or something else which may need to be reported. Thanks for any advice!
As I recall from when I did look at the Mercan investments, you are buying a property and receiving a deed for it, and the actual purchase of real estate isn’t reportable since you own it as a private individual. However, you are also entering into an agreement where you are leasing the property back to Mercan and getting paid. This counts as income to you which needs to be reported on your taxes in the same way as if you were purchasing a house and renting it out - which is basically what you are doing. I imagine Mercan can offer some general guidance.
Thanks I chose a property with no income and a lower purchase price as I figured it wasn’t worth the hassle for a low yield when I can instead put the saved money into higher yielding CDs
I’m not an accountant or lawyer, and this is absolutely not tax advice.
Mercan is not going to offer general tax guidance. They did offer me a free consultation with their international accountants, and I also consulted another tax accountant, and the short answer is that they don’t really know. (For instance, in a way you gave a zero-interest loan to Mercan, and if so imputed interest could apply. And as you suspected, the entire deal can look a bit like investing in a foreign company.)
FWIW, I decided to keep it simple, treat it as a property purchase, and initially reported nothing. Once the hotel started operating, I started reporting depreciation to lower the cost basis when selling back to Mercan.
As Jeff pointed out, if you receive an interest payment from Mercan that would clearly be taxable income in the US.
Hi,
I have been debating pros and cons of claiming depreciation. I can see an advantage in doing so to lower taxes on those properties that are generating income. However, the fact that it lowers cost basis would be detrimental given it will appear as though we made profit (but clearly we will not as buy back will be at the initial purchase price). Have I got this correct?
Thanks,
Soujanya
From my amateur understanding, depreciation is not a choice, even if claiming it doesn’t give you tax benefits during your period of ownership. When you sell, the cost basis is the depreciated value of the asset.
IOW, Mercan will be paying you €140k (the €280k investment is half land and half building) for a six-year old hotel, which is worth less than a brand new hotel, and the IRS will not accept that your cost basis was the original purchase price. The land part is another interesting question that I don’t know the answer to.
You are correct in that IRS will have depreciation recapture at sale - regardless of whether it was taken or not on the building portion of the asset. From my research as land is not “worn down or used up”, you can neither take depreciation nor is there a depreciation recapture at sale. One additional question I have is whether you claimed depreciation by doing a cost segregation study or straight line method. My research indicates that if its a straight line method as this will be considered a foreign commercial short term rental (rather than a foreign residential short term rental), the depreciation will have to be over 40 years. Any thoughts on that?
Thanks,
Soujanya
Right. What I meant was that I’m unsure whether the market value of the land at the time of buyback will be relevant, or whether only the currency difference (value of € to the $ between the land purchase and buyback) matters.
I took a straight-line depreciation over 40 years.
Great, thank you. I appreciate your response.
Thanks,
Soujanya