Saturday, January 07, 2006

ARE FOREIGN REAL PROPERTY TAXES DEDUCTIBLE?

Most U.S. homeowners are familiar with the income tax deduction for real property taxes. What happens if you own property outside the U.S. - can you deduct real property taxes imposed in the foreign country?

The Internal Revenue Code is plain and simple on this issue - foreign real property taxes are deductible. However, Treasury Regulations impose an additional requirement - they provide that "real property taxes" (whether U.S. or foreign) must be imposed for the general public welfare, and not for "local benefits." An example of taxes imposed for local benefits are taxes imposed for benefits “such as streets, sidewalks, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied." [Regs. Section 1.164-4(a)].

Is this "local benefits" requirement something the IRS really cares about? Well, Isabelle Bichindaritz found it it does, at least when foreign real property taxes are involved. Isabelle sought to deduct real estate taxes she paid when she bought property in France in 2001. The Government contested the deduction and at trial before the U.S. Tax Court, Isabelle offered an English translation of a settlement statement that she received when she bought the property in question as evidence of the taxes and deductibility. The settlement statement showed that certain taxes were calculated in connection with her purchase of the property. Not good enough, said the Tax Court. Instead, the Tax Court wanted to see something that proved that the tax was not a tax imposing a "local benefit." Since no such evidence was presented, the deduction was denied. Isabelle Bichindaritz, TC Memo 2005-298.
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