Avoiding Double Taxation on Property You Own Abroad

Foreign Tax Credit (FTC), codified at IRC §§901-909, is the workhorse. It lets you credit foreign income tax paid, dollar-for-dollar, against your US tax liability on the same income. It's claimed on Form 1116 for individuals and has per-category limitations ("baskets") that prevent cross-category offsets. The FTC exists independently of any treaty — any foreign income tax paid to any country, treaty or non-treaty, is creditable.

Foreign Earned Income Exclusion (FEIE), codified at IRC §911, lets qualifying expats exclude up to a specified amount of foreign earned income from US gross income (2026: approximately $130,000). The FEIE is claimed on Form 2555 and requires passing either the Bona Fide Residence Test or the Physical Presence Test. Important: the FEIE only applies to earned income — wages, salary, self-employment — and does NOT apply to rental income, investment income, capital gains, or pensions. Our FEIE won't cover foreign rental income post covers this in detail.

US Tax Treaties are bilateral agreements with roughly 70 countries that modify the default rules. The IRS tax treaty index has the full list. For Americans with foreign property, the most relevant treaty provisions are typically:

• Article 6 (Income from Real Property): confirms the host country has primary taxing right over rental income from property located there
• Article 13 (Capital Gains): most treaties allow the host country to tax gains from immovable property located in its territory
• Article 23 or 24 (Relief from Double Taxation): sets the mechanism for each country to credit the other's tax
• Article 25 (Mutual Agreement Procedure): provides a dispute-resolution framework if you get hit twice anyway

The FTC and the treaty mechanisms are designed to work together — the treaty confirms taxing rights, the FTC provides the numerical credit. In practice, you claim the FTC under domestic law (IRC §901) and rely on treaty provisions only for interpretive questions and resourcing disputes.

For a list of all US tax treaty texts, US Treasury tax treaties page is more comprehensive than the IRS's list. The Tax Notes Worldwide Tax Treaties database is the standard professional reference if you need to pull actual treaty language.

Rental income from foreign property is the single largest double-taxation scenario for most American owners, and it's also the most cleanly resolved by the FTC.

Step 1: The foreign country taxes the rental income under its own domestic rules. Most major countries tax non-resident rental income at a flat rate:

• Portugal: 28% flat (non-resident)
• Spain: 24% flat (EU/EEA residents 19%, non-EU 24%)
• France: 20% up to a threshold, 30% above (non-residents), plus 17.2% social charges (though US-France treaty protocol limits the social charges for US-based landlords)
• Italy: 21% flat optional regime (cedolare secca) or progressive rates up to 43%
• Mexico: 25% flat for non-residents
• Germany: 14.77% to 47.5% progressive

Step 2: The US also taxes the same income. Report on Schedule E with full US-side deductions (mortgage interest, property tax, depreciation, etc.). Compute US tax at your marginal rate.

Step 3: Claim the FTC on Form 1116 in the "passive category" basket. The FTC is limited to the smaller of (a) foreign tax actually paid, or (b) US tax attributable to the foreign-source income.

Step 4: Net US tax on rental income after FTC = typically zero, if the foreign rate is higher than your effective US rate on the same income. Excess foreign tax (unused FTC) can be carried back 1 year or forward 10 years.

For a walked-through example, see our how the US taxes rental income from property in Mexico post — the mechanics are the same for any country with a tax treaty and a domestic rental tax rate higher than US marginal rates.

The Net Investment Income Tax (NIIT) gap: This is the one real double-taxation failure mode for rental income. The NIIT is a 3.8% surtax on net investment income for high-income taxpayers (MAGI over $200K single, $250K MFJ), codified at IRC §1411. Rental income is "net investment income" for NIIT purposes. And the NIIT is NOT offset by the Foreign Tax Credit for individuals, because §1411 doesn't cross-reference §901.

So a high-income American landlord with Portuguese rentals pays: 28% Portuguese tax + 3.8% US NIIT = 31.8% total, even though the FTC wipes out the regular 24-37% US income tax on the same income. For $30,000 of net rental income, that's $1,140 of genuine US tax over and above the Portuguese tax — actual double taxation, not avoidable with treaties or FTC under current law.

The Tax Court case Toulouse v. Commissioner (2021) held that the NIIT cannot be offset by foreign tax credits under the standard FTC rules. Some practitioners argue that treaty-based credit claims (citing specific treaty article language) can offset NIIT, but this is an aggressive and not-yet-settled position. If your income profile is high enough for NIIT to matter, discuss with a cross-border CPA whether any treaty-based claim might work for your specific country. For France, the specific wording of the France-US tax treaty is most favorable to this argument; for most other countries, the argument is weaker.

When you eventually sell your foreign property, both the foreign country and the US typically claim taxing rights on the gain. The FTC applies here too, but with some treaty wrinkles that can matter a lot.

Foreign side: Most countries tax gains from local real estate regardless of the seller's residence. Typical rates:

• Portugal: 28% on the gain for non-residents (with 50% exclusion for tax residents)
• Spain: 19% flat for non-residents, plus 3% withholding at source on gross sale price (credited against final tax)
• France: 19% capital gains + 17.2% social charges (with exemptions after 22 and 30 years)
• Italy: 26% for short-term, tax-free after 5 years for residents
• Mexico: 25-35% progressive, or 35% flat non-resident
• UK: 18-28% depending on income level and whether residential or non-residential

US side: The gain is reported on Schedule D and taxed at US long-term capital gains rates (0/15/20%) plus NIIT if applicable. You also face depreciation recapture under IRC §1250 on any prior depreciation claimed, at up to 25%.

The FTC mechanics: The FTC for capital gains lands in the "passive category" basket on Form 1116, same as rental income. You can claim a credit equal to the smaller of (a) foreign tax paid, or (b) US tax on the foreign-source gain.

Here's where treaty resourcing rules matter: some US treaties include a "resourcing" provision that lets you treat the US-side gain as foreign-source for FTC purposes. The US-Portugal treaty doesn't have particularly favorable resourcing. The US-France treaty has strong resourcing language that can effectively eliminate US tax on French capital gains for some taxpayers. The US-UK treaty is complex but workable.

For most Americans, the practical outcome on a foreign property sale is: pay the foreign capital gains tax, then pay any US tax not covered by the FTC, net total is roughly the higher of the two rates. For a Portuguese property sale after 10 years at 28% Portuguese tax and 15-20% US long-term capital gains rate, the FTC fully covers the US side and you just pay Portugal.

The exception — and it's a real one — is depreciation recapture. If you depreciated $90,000 over 10 years of ownership, you face $22,500 of recapture at the 25% max rate, and the Portuguese tax may or may not fully cover this portion depending on how much of your gain is economic appreciation vs. depreciation catch-up. See our capital gains on foreign property post for a full walked example.

American homeowners in the US deduct mortgage interest on their primary residence under Schedule A, up to statutory limits. American owners of foreign personal-use property — a vacation home, a second home not rented out — can also claim this deduction on Schedule A, subject to the same $750,000 acquisition debt limit and the residence must be a "qualified residence" under IRC §163(h)(4).

The quirk: the mortgage can be from a foreign bank (Portuguese, Mexican, French, whatever), and the interest is still deductible under US rules. The foreign bank is not a "qualified lender" in any special sense — the statute doesn't care where the lender is, only what the loan is secured by and what the borrower uses it for.

Rental foreign property mortgage interest is deducted on Schedule E, not Schedule A, and is subject to different rules (no $750K cap for rental, but subject to the passive activity loss limitations).

The "double taxation" risk for mortgage interest is really about whether your foreign country gives you a deduction for it. Most countries with income tax do allow mortgage interest deductions for residents (usually against rental income or as a primary-residence deduction), so if you become a tax resident of the foreign country, you may be able to deduct the same interest on both returns — not double taxation, but double deduction, which is often allowed under domestic rules but could be challenged under the mutual-exclusivity principle in some treaties.

Most cross-border CPAs treat the dual-deduction position as defensible for mortgage interest where the underlying debt is the same obligation claimed on both returns. The IRS Publication 936 (Home Mortgage Interest Deduction) is the authoritative source on the US side, and each country's own tax code governs the foreign side.

For a broader treatment of whether paying cash vs. mortgaging makes sense from a tax perspective, see our mortgage deduction cash abroad post.

The Tax Cuts and Jobs Act of 2017 added IRC §164(b)(6) limiting state and local tax (SALT) deductions to $10,000 — and, critically, it also prohibited the deduction of foreign real property taxes on Schedule A for personal-use property. This is the "SALT cap for foreign taxes" most Americans don't know about.

Before 2018, you could deduct your Portuguese IMI, Spanish IBI, Mexican predial, or French taxe foncière on your Schedule A alongside US state property taxes. Post-2018, this is disallowed for personal-use property.

What still works: If the foreign property is a rental (Schedule E), foreign property tax is deductible as a business expense regardless of the §164(b)(6) limitation. The Schedule A limitation only applies to personal-use deductions.

If the foreign property is a pure second home or vacation home with no rental use, the foreign property tax is simply not deductible on the US return after 2018. This is real double taxation in a sense — you pay the foreign property tax and get no US offset — but it's small dollars for most taxpayers. Our property tax Mexico vs California post runs the math and shows why, even without the deduction, foreign property taxes are usually dramatically lower than US equivalents.

The TCJA changes are scheduled to sunset after 2025 unless extended, so it's possible (though not certain) that the foreign property tax deduction for personal-use property could return starting in tax year 2026. Monitor the Joint Committee on Taxation and the Tax Foundation TCJA analysis for updates.

Inheritance and estate taxes are the one area where genuine double taxation happens with some frequency for American property owners abroad, because US-side estate tax law and foreign-side inheritance tax law have different triggers and don't always mesh.

US estate tax: Applies to worldwide assets of a US citizen decedent, with a unified credit that exempts the first ~$13.9M (2026 figure, indexed for inflation) under current law. Foreign property is included in the gross estate. US estate tax rates go up to 40%.

Foreign inheritance/estate tax: Varies wildly.

• No inheritance tax: Portugal, Mexico (no federal inheritance tax; state-level stamps only), Australia, New Zealand, Sweden, Norway, Austria (for most cases)
• Low inheritance tax: Italy (4-8% depending on relationship), Spain (graduated by region, Madrid essentially 0%, Catalonia up to 32%)
• Moderate inheritance tax: Germany (7-50% progressive), UK (40% above £325K)
• High inheritance tax: France (5-60% progressive, high on non-direct descendants)

Treaty situation: The US has separate estate tax treaties (not the same as income tax treaties) with about 17 countries including France, Germany, Italy, the UK, and Japan. These treaties provide specific rules for allocating taxing rights on the decedent's property. For countries without estate tax treaties, the default is that both countries may tax, with the US giving a credit under IRC §2014 for foreign death tax paid on property located in that country.

Practical impact: For most Americans whose estates are well below the $13.9M exemption, US estate tax is zero regardless of foreign property. The foreign inheritance tax matters, and it varies by country — worth planning for, but not genuinely "double" taxed unless your estate is large.

For estates above the US exemption, the FTC-style credit mechanism under §2014 generally prevents the worst double-taxation outcomes, but the computation is complex and the result can be that you pay the higher of the two countries' rates on the portion of the estate represented by the foreign property. Our inheritance tax Iberia Italy vs US heirs post walks through the specific Portugal/Spain/Italy comparison. The American Bar Association Section of International Law estate planning materials and BNA Tax Management Portfolio on International Estate Planning are the cleanest professional resources.

For any American property owner worried about double taxation on a specific income stream, the decision tree is:

1. Is there a US-[country] income tax treaty? If yes, most double-tax concerns for rental income and capital gains are handled by the FTC plus treaty resourcing. If no (countries without treaties include most of Africa, parts of the Middle East, some of Latin America — see the IRS treaty list), you still get FTC under domestic §901 law, but you lose the treaty's tiebreaker rules.

2. What is the foreign tax rate on this specific income category compared to your US marginal rate? If the foreign rate is higher (typical for European rental income), FTC fully covers your US tax and you effectively pay only the foreign tax. If the foreign rate is lower (some Latin American dividend taxes, certain special regimes), you pay the foreign amount plus the differential to the US.

3. Does the NIIT apply? If you're above the $200K/$250K MAGI threshold and earning rental or investment income from foreign property, the 3.8% NIIT will apply and generally can't be offset by FTC (except via aggressive treaty-based claims). This is the one genuine double-taxation bucket most high earners should plan for.

For Reddit and forum reality checks on double-taxation scenarios, r/ExpatTaxes, r/ExpatFIRE double taxation threads, and the American Citizens Abroad community forum are all active. Greenback Expat Tax Services publishes regular walkthroughs of specific scenarios, and TFX (Taxes for Expats) has a searchable knowledge base with country-specific case studies.

The headline fear of double taxation on foreign property is, for most Americans, overblown. The Foreign Tax Credit under IRC §901 is a broad-spectrum tool that handles 90% of the concern for rental income and capital gains. US tax treaties add certainty and occasionally improve resourcing but aren't strictly necessary for the FTC to work. Domestic deductions on Schedule E plus 30-year depreciation further reduce the US side.

The real double-taxation scenarios that remain:

• NIIT at 3.8% on rental income for high earners — not offsetable by standard FTC, potentially offsetable via aggressive treaty-based claims in specific countries
• Foreign property tax on personal-use (non-rental) property — disallowed on US Schedule A since 2018, no US offset available, small dollars but real
• Estate tax for very large estates where US + foreign combined exceeds what the §2014 credit mechanism can resolve
• Specific treaty gaps in non-treaty countries, particularly around capital gains and passive income

All other cases are effectively single-taxed once the FTC is properly claimed. Americans who panic about double taxation without running the numbers typically overestimate the problem by a factor of 5-10x. The right first step for anyone holding or planning to hold foreign property is to pay a cross-border CPA for a single hour of scenario modeling ($300-800) — the specific numbers will either confirm that the FTC solves your problem, or identify the 10% of cases where you actually need planning. Either outcome is worth the money, and both are cheaper than not knowing.