Key Takeaways
Foreign Rental Property and Form 8858:
- Direct ownership of foreign rental property generally does NOT require Form 8858
- Form 8858 is required when property is held through a foreign disregarded entity
- Common structure: Foreign single-member LLC or company holding rental property
- Rental income is still reported on Schedule E regardless of entity structure
- FBAR and FATCA reporting may apply separately
Table of Contents
Introduction
Owning foreign rental property creates U.S. tax reporting obligations, but whether you need Form 8858 depends entirely on how you hold the property. Many U.S. taxpayers are surprised to learn that simply owning overseas real estate doesn’t trigger Form 8858, but holding that same property through a foreign entity can.
The critical distinction is entity structure. Direct ownership in your personal name has different reporting requirements than ownership through a foreign disregarded entity (FDE). This guide explains when Form 8858 applies to foreign rental property and what other reporting obligations you might face.
When Form 8858 is Required for Rental Property
Form 8858 is required when you hold foreign rental property through a foreign disregarded entity. An FDE is a foreign entity with a single owner that’s treated as disregarded (ignored) for U.S. federal tax purposes.
Property Held Through Foreign Single-Member LLC
Many countries have LLC equivalents or similar entity types that qualify as disregarded for U.S. tax purposes when owned by a single U.S. person.
Example:
Sarah, a U.S. citizen, forms a Mexican S. de R.L. de C.V. (single-member version) to hold her Cancun vacation rental. The entity has one owner (Sarah) and hasn’t elected corporate treatment, so it’s treated as a disregarded entity. Sarah must file Form 8858 annually.
Property Held Through Other FDE Structures
Other foreign entity types that may be treated as FDEs include:
- UK private limited company (single shareholder, check-the-box election)
- German GmbH (single shareholder, check-the-box election)
- French SARL (single shareholder, check-the-box election)
- Canadian ULC (unlimited liability company)
- Hong Kong private limited company (with election)
The key factors are:
- Single owner for U.S. tax purposes
- Entity type is an “eligible entity” under Treasury Regulations
- No election to be treated as a corporation
Check-the-Box Election Scenarios
Some foreign entities that would otherwise be corporations can elect disregarded status by filing Form 8832. If you made this election for an entity holding rental property, Form 8858 is required.
Example:
James owns 100% of a UK Ltd holding London rental property. He filed Form 8832 to treat the UK Ltd as disregarded for U.S. tax purposes. The check-the-box election makes the entity an FDE, requiring Form 8858.
Multiple Properties in Single FDE
If one FDE holds multiple rental properties, you file one Form 8858 for the entity. The form covers all properties held by that single FDE.
Example:
Maria’s Mexican entity owns three rental condos in Puerto Vallarta. She files one Form 8858 for the entity, reporting aggregate financial information for all three properties.
When Form 8858 is NOT Required
Understanding when Form 8858 doesn’t apply is equally important.
Direct Ownership in Personal Name
If you own foreign rental property directly in your personal name (not through any entity), Form 8858 doesn’t apply.
Example:
Tom, a U.S. citizen, owns a vacation condo in Costa Rica directly in his name. No foreign entity is involved. Tom reports rental income on Schedule E but doesn’t file Form 8858.
Direct ownership still requires:
- Schedule E (rental income/loss)
- FBAR if you have foreign financial accounts related to the property
- Form 8938 if you meet FATCA thresholds
- Form 3520 if property was received as a gift or through a foreign trust
Property Held Through Foreign Corporation
If your foreign entity is treated as a corporation for U.S. tax purposes, Form 5471 applies instead of Form 8858.
When the Entity is a Corporation:
- The entity is a per se corporation (listed in regulations)
- The entity elected corporate treatment on Form 8832
- The entity has multiple owners and didn’t elect pass-through treatment
Example:
Lisa owns 100% of a French SAS (per se corporation) holding Paris rental property. She files Form 5471, not Form 8858.
Property Held Through Foreign Partnership
If the foreign entity has multiple owners and is treated as a partnership, Form 8865 may apply instead of Form 8858.
Example:
David and his brother (both U.S. citizens) jointly own a Spanish SL holding Barcelona rental property. The two-member entity is treated as a partnership. If David meets the Form 8865 filing categories, he files Form 8865, not Form 8858.
U.S. LLC Holding Foreign Property
If you use a domestic LLC (U.S. entity) to hold foreign property, the LLC isn’t a foreign entity, so Form 8858 doesn’t apply.
Example:
Jennifer forms a Wyoming LLC to hold Canadian rental property. The Wyoming LLC is a domestic entity. No Form 8858 is required (though other reporting may apply).
Entity Structures for Foreign Rental Property
Understanding common ownership structures helps you identify your filing requirements.
Direct Ownership
Structure: Property titled in your personal name
Form 8858 Required: No
Other Reporting:
- Schedule E (rental income)
- FBAR (if foreign accounts exceed $10,000)
- Form 8938 (if assets exceed FATCA thresholds)
Advantages:
- Simplest compliance
- No entity-level reporting
- Lower accounting costs
Disadvantages:
- No liability protection from foreign entity
- May not meet local legal requirements
- May have adverse local tax consequences
Through Foreign Disregarded Entity
Structure: Single-member foreign entity holding property
Form 8858 Required: Yes
Other Reporting:
- Schedule E (rental income flows through)
- FBAR (if foreign accounts exceed $10,000)
- Form 8938 (the FDE interest itself is a specified foreign financial asset)
- Schedule M if intercompany transactions
Advantages:
- Liability protection in local jurisdiction
- Meets local legal/regulatory requirements
- Simplifies local tax compliance in some countries
Disadvantages:
- Form 8858 filing requirement
- Higher compliance costs
- Entity maintenance costs
Through Foreign Corporation
Structure: Foreign corporation (per se or elected) holding property
Form 8858 Required: No (but Form 5471 likely required)
Other Reporting:
- Form 5471 (if you’re a U.S. shareholder)
- Form 8938 (stock is a specified foreign financial asset)
- FBAR (corporate accounts may need reporting)
Advantages:
- Strong liability protection
- May provide local tax benefits
Disadvantages:
- Form 5471 is more complex than Form 8858
- Potential double taxation
- CFC rules may apply (GILTI, Subpart F)
- Higher compliance and accounting costs
Compliance Checklist: FDE Rental Property
If you hold foreign rental property through an FDE, follow this compliance checklist.
1. Identify Entity Classification
Confirm the foreign entity is treated as disregarded:
- Review formation documents
- Check if Form 8832 election was filed
- Verify single-owner status
- Confirm entity type is “eligible entity” under regulations
2. Gather FDE Formation Documents
Collect documents needed for Form 8858:
- Articles of incorporation/formation
- Operating agreement or bylaws
- Entity identification numbers (local and U.S. if applicable)
- Organizational chart showing ownership
3. Calculate Rental Income/Expenses
Prepare financial information for the FDE:
- Rental income received
- Operating expenses (management, repairs, utilities)
- Depreciation (using U.S. rules)
- Foreign taxes paid
- Currency conversion to U.S. dollars
4. Prepare Form 8858 with All Schedules
Complete the form:
- Main Form 8858 (entity information, financial summary)
- Schedule C-1 (shareholders of controlling corporation, if applicable)
- Schedules G, H, I, J (various CFC-related items)
- Schedule M (intercompany transactions)
5. File with Annual Income Tax Return
Attach Form 8858 to your:
- Form 1040 (individual return)
- Form 1120 (corporate return)
- Form 1065 (partnership return)
- Form 5471 or Form 8865 (if FDE is owned by a CFC or foreign partnership)
6. Consider FBAR Requirements
Separately evaluate FBAR filing:
- Do you have signature authority over foreign accounts?
- Do foreign accounts exceed $10,000 at any point during the year?
- The FDE’s bank accounts may trigger your FBAR requirement
7. Consider Form 8938 (FATCA) Requirements
Evaluate FATCA reporting:
- Your interest in the FDE is a specified foreign financial asset
- Threshold depends on residency and filing status
- Report on Form 8938 if thresholds are met
Common Scenarios
Scenario 1: U.S. Expat Living Abroad
Situation: Jennifer, a U.S. citizen living in Germany, owns a Berlin apartment through a German GmbH (single-member) that she formed when purchasing the property. The GmbH is treated as disregarded.
Filing Requirements:
- Form 8858 annually for the GmbH
- Schedule E for rental income/loss
- FBAR for GmbH bank account if balance exceeds $10,000
- Form 8938 for GmbH interest if it exceeds thresholds
- German tax return for local compliance
Key Considerations:
- Currency conversion using appropriate exchange rates
- Foreign tax credit for German taxes paid
- Depreciation differences between U.S. and German rules
Scenario 2: U.S. Investor with Multiple Properties
Situation: Michael owns five vacation rentals in Mexico through a single Mexican entity. He’s the sole owner, and the entity hasn’t elected corporate treatment.
Filing Requirements:
- One Form 8858 for the Mexican entity
- Schedule E for all rental income (can use one Schedule E per property or aggregate)
- FBAR for Mexican bank accounts
- Form 8938 if assets exceed thresholds
Key Considerations:
- Aggregate reporting on Form 8858 for all five properties
- May need Schedule M if there are transactions with other related entities
- Consider Mexican tax treaty benefits
Scenario 3: Inherited Foreign Property
Situation: Lisa inherited her father’s Italian vacation home. Her father had held it through an Italian SRL (single-member). Lisa is now the sole owner of the SRL.
Filing Requirements:
- Form 8858 going forward (starting with year of inheritance)
- May need to catch up on prior years if father wasn’t compliant
- Consider Form 3520 for the inheritance itself
- Schedule E for ongoing rental income
Key Considerations:
- Determine if father filed Form 8858 (check for delinquency issues)
- Step-up in basis for the property
- Entity classification confirmation
Scenario 4: Recently Converted to FDE
Situation: Robert owned Costa Rican rental property directly, then transferred it to a newly formed Costa Rican entity for liability protection.
Filing Requirements:
- No Form 8858 for years of direct ownership
- Form 8858 required starting with year property was transferred to entity
- Report transfer on Schedule O if applicable
- Potential gain recognition on transfer
Key Considerations:
- Transfer to foreign entity may trigger gain under IRC Section 367
- Form 8858 requirement begins with entity formation/ownership
- Document entity classification from formation
Related Filing Requirements
Foreign rental property often triggers multiple reporting obligations beyond Form 8858.
FBAR (FinCEN Form 114)
If you have signature authority over foreign financial accounts with aggregate value exceeding $10,000 at any point during the year, you must file an FBAR.
FDE Rental Property Considerations:
- The FDE’s bank account may be reportable on your FBAR
- Rental security deposits in foreign accounts count
- FBAR deadline is April 15 with automatic extension to October 15
Form 8938 (FATCA)
Your interest in a foreign entity (including an FDE) is a specified foreign financial asset reportable on Form 8938 if you exceed the thresholds.
Thresholds (living in U.S.):
- Unmarried: $50,000 year-end / $75,000 during year
- Married filing jointly: $100,000 year-end / $150,000 during year
Thresholds (living abroad):
- Unmarried: $200,000 year-end / $300,000 during year
- Married filing jointly: $400,000 year-end / $600,000 during year
See our FBAR vs Form 8938 comparison for more details.
Form 3520/3520-A
If you received the foreign property as a gift from a foreign person or through a foreign trust, you may need to file:
- Form 3520 (Annual Return to Report Transactions with Foreign Trusts)
- Form 3520-A (Annual Information Return of Foreign Trust)
Local Country Reporting
Don’t forget compliance in the country where the property is located:
- Local income tax returns
- Property tax filings
- VAT or other local taxes
- Rental registration requirements
Frequently Asked Questions
Do I need Form 8858 if my foreign property isn’t rented?
If the property is held through an FDE, you likely still need Form 8858 even if there’s no rental income. The form reports the FDE itself, not just rental activity. However, if the property is held directly (no entity), no Form 8858 is required regardless of rental activity.
What if my foreign entity owns the property jointly with someone else?
If the entity has multiple owners, it’s likely treated as a partnership rather than a disregarded entity. You’d file Form 8865 instead of Form 8858 (if you meet the filing categories). Or if it’s a corporation, Form 5471.
How do I report rental losses?
Rental losses from foreign property held through an FDE are reported on Schedule E like domestic rentals. Passive activity loss rules apply. The loss flows through the FDE to your personal return.
What about depreciation on foreign property?
You depreciate foreign rental property using U.S. rules (39 years for nonresidential, 27.5 years for residential). The depreciation deduction appears on Schedule E even though the property is held in an FDE.
Do I need Form 8858 for vacant land?
If you own vacant land through an FDE, you still file Form 8858 for the entity. However, without rental activity, there’s less financial information to report. The form still captures the entity’s existence and structure.
What if I sell the property?
When you sell property held through an FDE:
- Report gain/loss on your U.S. return (flows through the FDE)
- FIRPTA doesn’t apply (seller is U.S. person)
- Form 8858 covers the year of sale
- If you dissolve the FDE, report final Form 8858
When to Get Professional Help
Consider professional assistance when:
- Multiple foreign properties create complex reporting
- Entity structure is unclear and you need classification analysis
- You’re unsure about filing requirements after property acquisition
- Penalty concerns from prior year non-compliance
- You need to coordinate Form 8858 with FBAR, Form 8938, or Form 3520
SDO CPA specializes in international tax compliance for U.S. persons with foreign real estate. We can analyze your structure and ensure you’re meeting all filing requirements.
Conclusion
Form 8858 is required when you hold foreign rental property through a foreign disregarded entity. Direct ownership doesn’t trigger the form, but using a foreign single-member entity for liability protection or local legal requirements brings Form 8858 into play.
Understanding your entity structure is the first step in determining your reporting obligations. If you’re holding foreign property through any foreign entity, confirm the classification and your corresponding U.S. filing requirements.
Beyond Form 8858, don’t overlook FBAR, Form 8938, and local country tax obligations. Foreign rental property creates a web of compliance requirements that’s easy to miss.
Get Help with Form 8858 for Foreign Rental Property
Related Resources
- Form 8858 Foreign Disregarded Entity Guide
- Who Must File Form 8858
- FBAR Filing Guide
- FBAR vs Form 8938 Comparison
- Form 8858 Penalties and Relief
- Form 8858 Filing Services
- International Tax Services
This article is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional for advice specific to your situation.