U.S. Individual's Investment in Overseas Rental Property

The regulations under Sec. 904, issued in July 2004, make clear that the subpart F provisions continue to apply to overseas investment in real property by individuals. Those regulations expand the definition of what are considered active rents for the purposes of determining the passive activity foreign tax credit limitation. However, in passing, the preamble to those regulations reaffirms the long-standing but often overlooked and misunderstood rules about what constitutes active rents for subpart F inclusion purposes (TD 9141). This article addresses the tax ramifications of a typical scenario in today's hot Costa Rican real estate market, which likely is applicable to many practitioners. Individuals generally are taxable on the cash basis. Corporations that do not repatriate earnings to individuals generally do not trigger a second layer of tax at the individual level. However, these rules are potentially superseded in certain cases, such as foreign corporations that are predominantly US owned (controlled foreign corporations)