European Rental Property Considerations

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Rick77
Posts: 3
Joined: Wed Sep 05, 2018 11:20 pm

European Rental Property Considerations

Post by Rick77 » Thu Sep 06, 2018 12:04 am

Hello there,

long time reader, first time poster...also a first time rental property investor here.
I am trying to make a purchase decision for a rental property in Europe and spent quite some time crunching numbers and reading up on TAX implications, but can’t seem to find some answers, hence I’d appreciate any pointers.

Details: Small rental property with construction start in late 2018 and completion early 2019, partial payments will follow construction progress, hence about 1/3rd due in 2018 and 2/3 in 2019, no financing needed. The purchase is expected to trigger property transfer tax and property tax in Europe in 2018 and 2019. About me, CA based with W2 and investment income, high TAX bracket.

Questions:
1. No rental income in 2018 and I understand that I can’t deduct rental losses from my other income. I there a way to carry over some or all of the loss from 2018 to 2019 when rental income is expected? I understand a carry over is possible..will this include travel cost to Europe/TAXes and other cost occurring as part of the purchase?
2. Is filing a schedule E in 2018 required? (I think so in order to record the loss carrying over, not sure)
3. Are there any other considerations or tips one can think of?

Thank you kindly,

Rick

SouthernCPA
Posts: 677
Joined: Wed Sep 23, 2015 10:20 am

Re: European Rental Property Considerations

Post by SouthernCPA » Thu Sep 06, 2018 11:20 am

Rick77 wrote:
Thu Sep 06, 2018 12:04 am

Questions:
1. No rental income in 2018 and I understand that I can’t deduct rental losses from my other income. I there a way to carry over some or all of the loss from 2018 to 2019 when rental income is expected? I understand a carry over is possible..will this include travel cost to Europe/TAXes and other cost occurring as part of the purchase?
2. Is filing a schedule E in 2018 required? (I think so in order to record the loss carrying over, not sure)
3. Are there any other considerations or tips one can think of?
Disclaimer: I have been out of tax practice since just prior to the Trump tax reform, so some of this may not still be accurate. But in general I'll answer your questions:

1. Costs incurred prior to placing the property in service will be added to your property basis and will be depreciated when you place the property in service (i.e. putting it on the market available for rent). There may be a few expenses you can take as expenses in 2018 rather than added to Basis and capitalized, but I would consult with your CPA to make sure these are allocated correctly between current year expenses and cost basis.

Travel expenses would be deductible, in general, but you've got to really document that they are for the rental property activity and not just a vacation where you happened to stop by the rental.

Your income is probably going to be too high where Passive Loss Limitations are phased out and you wont receive any additional benefit for the rental losses in excess of rental income anyway.

2. Yes, you will likely have expenses for 2018 that will need to be captured and carried forward if they can't be used in 2018.

3. The largest consideration in my mind is that this is your first rental property and you are going to be doing it not just long distance, but in a different country with an entirely different set of landlord laws than we have here. Long distance landlording is tough enough, add in that you will be cutting your landlord teeth with foreign laws and have to go to Europe everytime there is an issue...I just don't know if logistically that is the smartest move. Even with a property manager, they must be managed too.

Financially you'll also be complicating your tax filings. You probably will have to file a tax return in the country that your rental property is located in addition to your US tax return.

Another headache is you will probably have to open European bank accounts to take rental deposits and payments. This means you will probably have to add FBAR Compliance to things you need to monitor. This is where US taxpayers have to report assets held in foreign banks. This is not particularly difficult, but it's just another thing you have to keep up with. If you mess this up, the penalties can be draconian.

I guess I just don't think the "Juice is worth the squeeze" in a single rental property overseas. Just my opinion, though.

Valuethinker
Posts: 35664
Joined: Fri May 11, 2007 11:07 am

Re: European Rental Property Considerations

Post by Valuethinker » Fri Sep 07, 2018 5:16 am

Rick77 wrote:
Thu Sep 06, 2018 12:04 am
Hello there,

long time reader, first time poster...also a first time rental property investor here.
I am trying to make a purchase decision for a rental property in Europe and spent quite some time crunching numbers and reading up on TAX implications, but can’t seem to find some answers, hence I’d appreciate any pointers.

Details: Small rental property with construction start in late 2018 and completion early 2019, partial payments will follow construction progress, hence about 1/3rd due in 2018 and 2/3 in 2019, no financing needed. The purchase is expected to trigger property transfer tax and property tax in Europe in 2018 and 2019. About me, CA based with W2 and investment income, high TAX bracket.

Questions:
1. No rental income in 2018 and I understand that I can’t deduct rental losses from my other income. I there a way to carry over some or all of the loss from 2018 to 2019 when rental income is expected? I understand a carry over is possible..will this include travel cost to Europe/TAXes and other cost occurring as part of the purchase?
2. Is filing a schedule E in 2018 required? (I think so in order to record the loss carrying over, not sure)
3. Are there any other considerations or tips one can think of?

Thank you kindly,

Rick
Tenancy laws in Europe can be brutal. Ability to evict is not guaranteed.

Germans I know tend to rent on multi-year leases which is a plus adding stability. I gather different cities & states set their own rules, though?

If this is a vacation or retirement property for you then it might all work out fine - buy in a good location etc. Remember though that Europe as a whole is going to have static population growth (unless we welcome far more migrants). What you see in rural France (communities dying out) is going to be replicated across Western Europe in the next few decades. Switzerland is of course it's own story. This is a fast aging continent.

So attractive properties, which to Europeans means a southern sea coast or ski country, probably do OK. Ditto the gold (triangle) region (Munich, Ile de France, Brussels, Milan,Veneto + Stockholm). The forces of entrepreneurship and locational advantage seem to reside around these cities and surrounding areas. UK really who has a clue - Brexit is the big unknown plus government target to get immigration post Brexit down below 100k pa.

The rest? Who knows. The former DDR might provide a warning (declining, aging).

This simply to say don't be in a hurry to laden yourself with something which will be iliquid and potentially difficult to manage at long distance.

euroswiss
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Re: European Rental Property Considerations

Post by euroswiss » Fri Sep 07, 2018 8:22 am

Well, it looks like you have already pulled the trigger on your investment and of course, there are probably many more facets to this decision than what you were able to share. However, I do recommend you take seriously the words of caution offered above. Each country is different and I’m only familiar with one (Switzerland). Rental laws are VERY tenant friendly there, even compared to places like California. Also, rent to value ratios are exceptionally poor (compared to most places in the US), in part, because interest rates are ridiculously low (very easy to get an unamortized 10-year fixed mortgage for much less than 1%!), and, in contrast to the US, there is no expectation that they will rise anytime soon. This means that your cash is competing with essentially free loans which depresses rents.
The situation is probably less bleak for short term rentals, but those (Airbnb) are under serious attacks in many communities (much more so than even in the US).
And yes, it is true, you will likely have to file taxes locally (in addition to declaring the investment on your US return) and then work through whatever tax harmonization treaty exists between your European country and the US (assuming one even exists). All doable, but a big hassle. In fact, I’m in the process of giving away (to family, but still...!) my share in a Swiss rental, because I’m tired of it...

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Watty
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Re: European Rental Property Considerations

Post by Watty » Fri Sep 07, 2018 8:44 am

Also look into what sort of estate planning you will need to handle the house when(not if) you die.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: European Rental Property Considerations

Post by Valuethinker » Fri Sep 07, 2018 9:22 am

SouthernCPA wrote:
Thu Sep 06, 2018 11:20 am


I guess I just don't think the "Juice is worth the squeeze" in a single rental property overseas. Just my opinion, though.
If a retirement or vacation property it might work.

However the question of tenants then becomes even more complex, potentially.

The main situation I see is a European national living in the USA and likely to return to or retire to Europe and probably home country. Plenty of Portugese families in Canada maintain second homes near their place of origin in Portugal and when I was in Portugal I met retired Portugese with broad New Jersey accents in English! Social Security goes a long way in Portugal. Also I think in the Baltic States people who were exiled at end WW2 and moved back post 1990.

Don't know about Italy but Greece & Portugal this is very much a thing.

Rick77
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Joined: Wed Sep 05, 2018 11:20 pm

Re: European Rental Property Considerations

Post by Rick77 » Thu Sep 13, 2018 10:17 pm

Thank you all for the great feedback, some comments:
Financially you'll also be complicating your tax filings. You probably will have to file a tax return in the country that your rental property is located in addition to your US tax return.
I guess I’ll need to find out. Since this is in Germany, I’ll try to read up.
3. The largest consideration in my mind is that this is your first rental property and you are going to be doing it not just long distance, but in a different country with an entirely different set of landlord laws than we have here. Long distance landlording is tough enough, add in that you will be cutting your landlord teeth with foreign laws and have to go to Europe everytime there is an issue...I just don't know if logistically that is the smartest move. Even with a property manager, they must be managed too.
I understand the concern, but I feel pretty good about the project since it is a new commercial property with a property management in place which required a minimum/no input from me. I have a friend utilizing them already. Worst case scenario, I’ll have to ask the local friend to help out. I do not plan on this though..
Another headache is you will probably have to open European bank accounts to take rental deposits and payments. This means you will probably have to add FBAR Compliance to things you need to monitor. This is where US taxpayers have to report assets held in foreign banks. This is not particularly difficult, but it's just another thing you have to keep up with. If you mess this up, the penalties can be draconian.
I already have that bank account and also a low cost international money transfer service which nowadays is no problem anymore thanks to the Internet. FBAR looks pretty straight forward to me, no problem at all.
I guess I just don't think the "Juice is worth the squeeze" in a single rental property overseas. Just my opinion, though.
That is exactly what I am trying to determine, currently I am leaning toward pulling the trigger in that investment.
If this is a vacation or retirement property for you then it might all work out fine - buy in a good location etc
Commercial property near a major city, I feel pretty good about the location especially since I used to live there.

In summary, I’ll have to go find out the TAX details for Germany, if a TAX return is required or not..

Anyways, thanks all for the feedback, Any other comments or feedback would be appreciated!!!

TravelGeek
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Re: European Rental Property Considerations

Post by TravelGeek » Thu Sep 13, 2018 10:31 pm

Rick77 wrote:
Thu Sep 13, 2018 10:17 pm
I already have that bank account and also a low cost international money transfer service which nowadays is no problem anymore thanks to the Internet. FBAR looks pretty straight forward to me, no problem at all.
FBAR for a simple bank account is trivial in my experience. I am curious - what money transfer service do you use?
That is exactly what I am trying to determine, currently I am leaning toward pulling the trigger in that investment.

...

Commercial property near a major city, I feel pretty good about the location especially since I used to live there.
Are you planning to move back there eventually? Otherwise, does this investment promise a better ROI than you could get locally in the US?

Rick77
Posts: 3
Joined: Wed Sep 05, 2018 11:20 pm

Re: European Rental Property Considerations

Post by Rick77 » Thu Sep 13, 2018 11:23 pm

what money transfer service do you use?
Transferwise, took 2 days, but only because it was my first transfer. I expect less than 24h for future transfers.
Are you planning to move back there eventually?
Maybe, not sure yet. Main motivation is to diversify and especially to diversify into a different region. Aliso the investment size fits my bill. I am out here at the west coast and probably would need to invest a way higher amount here.
does this investment promise a better ROI than you could get locally in the US?
I have not seen anything like it here in the US, but I have not done a whole lot of research either. It is a combination of small business warehouse and office. Rough ROI numbers are somewhere around 8 percent (before fees) if It rents at the expected price point, but as said above, diversification is my main motivation, hence I’d be happy with less. I am pulling away from the stock market recently and have an appetite for something ‘save’ (I know some may call this type of investment everything else but save, but for me it is :happy )
Also look into what sort of estate planning you will need to handle
Good one, I have actually done that and it turns out that a Trust is not recognized in Europe, so I’ll have to find an alternative. Who knows, maybe I’ll need to set up a will over there, hope not..

Thanks again for the good pointers!! Much appreciated.

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