 U.S. Taxes on Indian Property Can Be a Hidden Trap
Many Indian NRIs in the U.S. own property in India inherited, gifted, or purchased. What most don’t realize is: the IRS taxes that rental income, even if tax was already paid in India.
Unfortunately, most CPAs aren’t trained in international tax, leading to either double taxation or under-reporting both of which can cost you dearly.
At Kewal Krishan & Co, we help Indian-Americans correctly report Indian rental income on their U.S. tax return, claim eligible deductions, and avoid IRS penalties potentially saving tens of thousands of dollars.
What the IRS Requires: Global Income Must Be Reported
Under IRC §61, U.S. tax residents must report worldwide income this includes rent earned from property in India. Whether you receive it in your Indian account, reinvest it, or gift it the IRS wants to see it on your Form 1040.
Example: How Indian Rental Income Is Taxed in the U.S.
Scenario:
Meera, a Green Card holder in California, earns ₹30,000/month from a flat in Delhi = ₹3.6 lakh annually (~$4,300). She pays ₹60,000 in municipal tax and spends ₹40,000 on repairs.
What she should report:
- Gross Income: $4,300
- Deductions Allowed in the U.S.:
- Property taxes
- Repairs and maintenance
- Depreciation (based on original cost converted to USD)
- Management fees
- Interest on home loan (if any)
Net income is taxed at her U.S. marginal tax rate (e.g., 24%).
Forms You Must File
| Form | Purpose |
|---|---|
| Form 1040 (Schedule E) | Report rental income and expenses |
| Form 1116 | Claim Foreign Tax Credit for TDS paid in India |
| Form 8938 | Report property if value > $50,000 (FATCA) |
| FinCEN 114 (FBAR) | Report rental bank account if balance > $10,000 |
Deductions You Can Claim in the U.S.
- Municipal/property tax (converted to USD)
- Repair expenses
- Broker or management commission
- Loan interest (on Indian home loan)
- Depreciation: 27.5 years straight-line under U.S. rules
- Travel expenses (if related to managing property)
Foreign Tax Credit: Avoiding Double Taxation
If India withheld TDS (typically 30%), you can claim that tax under Form 1116 as a Foreign Tax Credit, reducing your U.S. tax bill on the same income.
Common Mistakes to Avoid
- Not converting INR to USD using IRS Yearly Average Exchange Rate
- Claiming Indian depreciation U.S. has different method
- Not claiming depreciation at all (IRS can recapture this later)
- Not reporting the asset on Form 8938 or FBAR, leading to penalties
- Skipping TDS documentation always keep Form 16A
Step-by-Step Guide to Report Indian Rental Income
- Collect rent slips, bank statements, and Form 16A for the rental income
- Convert all values (INR) to USD using IRS average yearly FX rate
- Prepare Schedule E (Form 1040) to report gross rent and deduct expenses
- File Form 1116 to claim credit for Indian taxes paid
- If property value > $50k → file Form 8938
- If bank account used for rent collection > $10k → file FBAR (FinCEN 114)
- Keep records for at least 6 years for IRS audit protection
Conclusion
Owning rental property in India while living in the U.S. brings significant tax obligations. But it also creates opportunities to reduce your U.S. tax bill with the right compliance and planning.
At Kewal Krishan & Co, we specialize in cross-border taxation for Indian families. Let us help you file correctly and reduce your U.S. tax on Indian rental income.Â
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States, admitted to practice before the IRS as an Enrolled Agent. He represents clients in IRS audits and litigation, and is a trusted cross-border tax advisor to Indian families and U.S. businesses with global exposure.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax advisor for your unique situation. IRS regulations may change, and penalties for noncompliance can be severe.
FAQs
1. Do I have to report Indian rental income if it’s already taxed in India?
Yes. U.S. citizens and residents must report global income. You can claim a credit for Indian tax paid.
2. Can I claim depreciation on Indian property in the U.S.?
Yes, using the U.S. method 27.5 years straight-line depreciation.
3. Do I need to report my Indian bank account used for rent collection?
Yes, if balances ever exceeded $10,000, FBAR is mandatory.
4. What if I didn’t report my Indian rent last year?
You may need to amend your return or use IRS streamlined procedures if non-filing was unintentional.
5. Can I deduct Indian loan interest on U.S. taxes?
Yes, if the loan was used to purchase or improve the rental property.