Vacation Home Abroad: Tax Rules for Mixed-Use Foreign Properties

If you rent out your foreign vacation home part of the year and use it personally for the rest, the vacation home rules under Section 280A determine how much of your rental expenses you can deduct. The test is whether you use the property personally for more than 14 days per year or more than 10% of the days it was rented at a fair market rate, whichever is greater: if you exceed that threshold, your deductions are limited and cannot create a rental loss. Rental income from a foreign vacation home is fully taxable on your US return even if you pay tax on it locally, but you can claim the Foreign Tax Credit to offset the US tax on that rental income. If you sell the property, the $250,000/$500,000 home sale gain exclusion applies if you lived in it as your primary residence for at least two of the five years before the sale, but days spent renting it to guests do not count toward the two-year primary residence period. Currency gains on the sale are also taxable as ordinary income separate from the property gain, which is a complication that does not arise with US properties.