Philippine Rental Property
The subject of Philippine Rental Property came to me pretty much out of the blue a few days ago when I was talking with another American about US tax laws and US taxpayer responsibilities when living in the Philippines.
My American acquaintance was under the impression that US law somehow didn’t apply to US citizens living here in the Philippines. Truth is, it certainly does apply, in almost all cases, and, while we all tend to get that antsy, “Oh no, this can’t be good” feeling when talking about taxes, some of the ways the law applies here are more advantageous than dome of you apparently have been thinking.
Philippine Rental Property — Does US law Apply?
First of all, remember, this is lay opinion only. I think I have a pretty solid basis in fact for my comments and conclusions, but I am not a lawyer nor a CPS nor any other professional tax authority. Make sure you use one when making important tax decisions.
Second, I’d like to throw out a tip of the old blog hat to Don D. Nelson, a US Attorney and CPA, who wrote the article I originally got much of this Philippine rental property tax information from. If Don happens to read this, give me a shout, please, I’ve tried to reach you via email regarding some further questions I know I have, and I am sure some of my readers will have as well.
One lifestyle people often talk about, and some reject out of hand, sometimes without adequate thought, is to own or lease property here in the Philippines that can be rented out to others, full-time, or part of the year. This may be ideal for the foreigner, wanting to live here in the Philippines, but not able to live here full-time. Someone addicted to the “snowbird” sort of life (which ain’t a bad way of life for many, by the way).
If you rent out property to others, you of course are obligated to report income from this venture to the IRS. That’s pretty much the standard US law about anything regarding income. US citizens (and Permanent residents … that means US Green Card holders) (you did know that Green Card holders had to pay US taxes, didn’t you?), are required to report their world-wide income to the US IRS. No matter where you live and no matter how the income came to be income.
But when you rent out property, there are a number of tax advantages that may come your way … so it isn’t all as bleak a picture as it looks like at first.
When you are renting out your real property in a foreign country, as a US Citizen or permanent resident, you must not only comply with all tax requirements of that foreign country, but you must also report all rental information on your US income tax return. The rules are almost the same as those for rental property located in the US, but with some variations.
Philippine Rental Property — Tax Advantages?
- If you own the Philippine rental property in your individual name, you report all of your rental income and expenses on Schedule E of your Form 1040. All of the allowable expenses are the same as for US property. (this should apply if you buy a condo and rent it out full or part-time, or if you lease a home and land … something a foreigner can do legally, anywhere in the Philippines)
- Expenses you can deduct include management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance, depreciation, and other miscellaneous expenses. (this would almost certainly include rental management fees from the condo corporation … a majority of condos sold in the Philippines are already set up to seamlessly serve as Philippine rental property)
- You can take a credit against your US federal income tax for income taxes paid to the foreign country on your net rental income after deducting all expenses. That credit is limited to the amount of US Federal tax you paid on that rental income on your tax return. Any unused foreign tax credit can be carried over to future year. Most US states do not allow any credit for income taxes paid foreign countries. (As I have pointed out here many times, there is no requirement for an American living in the Philippines to have to pay ANY US State taxes if he/she chooses to structure his/her life properly)
- The same restrictions and limited allowable deductions for “vacation homes” apply when you have occupied the property yourself part of the time and rented it out to third parties at other times. (These regulations are somewhat restrictive and certainly require close study, but many people legally and successfully own condos in the US, use them part of the year for themselves and part of the year as rental, fully in compliance with the IRS rules. Philippine rental property can be just as advantageous, tax-wise, as US rental property)
- When the property is sold (if it is held in your individual name ) your net gain is taxed in the US at the applicable lower capital gains rates, and you can claim a credit against your US tax on the sale for the foreign capital gains or income taxes paid on that profit to the Republic of the Philippines. (Again, capital gains and other complex tax issues deserve competent, professional guidance, but my point here is, if you can structure a deal to make money legally in the US, there’s no reason you can’t do so withe Philippine rental property as well)
If the property was used for the 2 years during the previous 5 years prior to sale as your personal primary residence (you must actually live in it full-time during that period), you may be able to exclude up to $500,000 of the gain from your US income taxes under the exclusion allowed for sales of personal residences. If the Philippine rental property was rented out part of that time, some of the gain on sale will be subject to US income tax.