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I have lived in Turkey for the past 13 years. I'm a citizen of both the US and Turkey, and I have only gained foreign rental income while living here. My husband is a non-resident alien and we are in the process of applying for his green card using the I-130 petition.

I need to file a tax return for 2017, but I haven't filed for the past 3 years. I don't know whether I should file Married Filing Separately or Married Filing Jointly. Also, my foreign rental income is under $10,000 per year, and I pay income and property taxes in Turkey as well.

Do I still have to pay any taxes? What deductions or exemptions can I make, if any? What forms should I use when I file?

  • If none of your income is from the US then, between the Foreign Earned Income Exclusion and the US-Turkey tax treaty, it is pretty certain you won't owe taxes (you might owe penalties if you need to late file the missing returns, though). You might consider paying some qualified person to do the return(s) for you if you can manage that, however, since for non-residents the return is more complex than for residents. – Dennis Jan 30 '18 at 15:22
  • Because your spouse is not a US resident, permanent resident, or citizen, I believe you must file as "married filing separately." – phoog Jan 30 '18 at 16:34
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I am not a tax professional, but I am a US permanent resident, and I've filed taxes for myself and my wife (US citizen) for many years, including when we have been non-resident in the US.

Firstly, as phoog implies, there's no obvious reason given the info you provide, why your non-US-citizen, non-US-resident husband should file a tax return, so (absent some other info) you should file as "married filing separately".

Next, just for clarity, I should point out that most US citizens and residents are required to file a return every year. There is a calculator here on the IRS site that helps you figure out if you're required to file a return. If you were required to file a return for earlier years and did not, you'll probably need to file those earlier tax returns before the I-130 petition is approved. But let's put that to the side and focus on your current 2017 tax return.

I'm assuming that the "foreign rental income" you describe is from a property outside the US (as opposed to in the US, but outside Turkey). You'll typically need to file the main 1040 form, plus Schedule E (Supplemental Income and Loss) to cover your foreign rental income.

Schedule E has spaces for the various categories of expenses that you will set against the gross rental income. Some things to bear in mind:

  • If you share ownership of the rental property with someone else, e.g. your husband, then you just report your share of the income and expenses on Schedule E.
  • If you have a mortgage on the property, then the interest portion of the mortgage payment is an expense that you can enter on Schedule E (line 12).
  • The IRS regards the "improvement" portion of a property as subject to depreciation and you need to include the 2017 depreciation as an expense on line 18 of Schedule E (more below).
  • Your Turkish property taxes are an expense on Schedule E (line 16).

You didn't say whether you have any other income, but let's assume that you have a part-time job in Turkey and a savings account there. You would need to report your salary as foreign earned income and your savings account interest as foreign interest income. If you do have accounts outside the US you'll probably need to file IRS Form 8938 (Statement of Specified Foreign Financial Assets) with your return and file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) separately.

So, once you file your 2017 US tax return, will you actually owe tax to the IRS? Isn't it unfair that you're paying tax to Turkey and maybe have to pay it also to the US, even though you're not living there? As you probably already know, the US is unusual in taxing citizens on their worldwide income, even when they don't live in the US. But there is some relief, and it comes in two major forms:

  1. The Foreign Earned Income Exclusion. This allows you to exclude your salary from income tax. It does not apply to your rental or interest income.
  2. The Foreign Tax Credit. This allows you to set any taxes that you paid on the income you're reporting against the tax that the IRS would charge you.

Generally, you can only use one or the other for any particular income. Once that's all worked out you also get a $6,350 standard deduction for 2017 and a $4,050 individual exemption. You said your rental income is under $10,000, so (assuming your other unearned income isn't huge) it's unlikely there will be any US tax to pay.

Lastly, back to depreciation. What's that? Basically, it means that if you paid $150,000 for a house, of which $50,000 is for the land and $100,000 for the building, then the IRS views the real value of the $100,000 portion as depreciating over time. For foreign residential real estate, that depreciation period is 40 years and you use "MACRS straight-line depreciation". After 20 years, the depreciated value of your building is roughly $50,000, and after 40 years it's zero ("fully depreciated").

Why do you need to bother with this? The main reason is that, as a US citizen, the IRS is potentially going to tax you in the future on the capital gain you made on this property. Let's say you do keep it for 40 years and sell the whole property for $200,000. Because the IRS regards the $100,000 building as now having a value of $0, they are going to regard your sale as producing a gain of $150,000, which you will have to pay capital gains tax on. That's going to be the same whether or not you claim depreciation as an expense. But if you do claim depreciation as an expense each year, you reduce the potential tax payable each year on the rental income. Which means you can save more money to offset the eventual capital gains tax.

Clearly, there's a lot of complexity here, and it may be worth paying for an accountant or tax preparer who knows US tax law as it relates to foreign property to help you with the 2017 return. With that as a model, you may be able to file the earlier returns on your own (if they are needed).

İyi şanslar!

  • Your statement that the IRS will, effectively, force the value of the portion which you may depreciate to have depreciated, is inaccurate. When calculating the eventual capital gain, the value is only depreciated if you actually took the depreciation prior to selling the asset. For most people, there is significant benefit to taking the depreciation in earlier years. Among various other effects, it effectively moves some income from the current year into the year when the asset is sold, if you ever do sell, and has it taxed as a capital gain instead of straight income. – Makyen Apr 30 '18 at 20:29
  • As an expat you may be able to file as head of household rather than married filing separately: irs.gov/individuals/international-taxpayers/… – Eric Dec 1 '18 at 12:48

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