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To operate your Airbnb Short Term Rentals in a new country, it is necessary to register as a legal entity or an individual in that jurisdiction first.

If you are making a one-time investment or investing your own capital directly, you may consider registering as a foreign natural person and obtaining a local ITIN (Individual Taxpayer Identification Number). As a US citizen, the assets you own in foreign jurisdictions are not subject to legal rights or jurisdiction outside of the US, making it less crucial to operate through a separate legal system. However, if you own an LLC or different entity type to manage your real estate investment you may prefer to incorporate this company as foreign entity in the local jurisdiction to eliminate currency exchange risk.

When I set up my first fund to purchase short term rentals in Argentina, we decided to incorporate our Series LLC as foreign entity. To incorporate the company there we had to hire a local attorney. Not speaking the language and not having a physical presence in that country should not be a problem. I have covered a number of the best practices to find the right legal advisor in foreign country [LINK].

Taxation for capital gains and dividends overseas

When you sell a property that you own overseas, any capital gains from the sale will be subject to US taxation. The tax rate on these capital gains can vary, depending on your individual tax circumstances, ranging from 0% to 15%. Additionally, any rental income you receive from a property overseas must also be reported for US tax purposes.

Both income tax paid overseas for the capital earning and rental income can be used as a tax break. Income tax paid to the foreign can either be deducted or applied as a tax credit when filing your taxes in the US. You should file Form 1116 to claim the foreign tax credit if you are an individual, estate, or trust, and you paid or accrued certain foreign taxes to a foreign country.

The credit or itemized deduction you are able to take if you paid or accrued foreign taxes to a foreign country if taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability on a dollar to dollar basis. IRS 514 publication discusses when to use to apply a tax credit or itemized deduction, to minimize taxes to be paid.

Note that when calculating that the foreign source income tax credits are calculated up to the rates of U.S. tax on that same income. If the tax income rates applied by the foreign country surpass the rates applied U.S. tax on that same income, that amount will be a loss.

We advise you to consult with your tax specialist when preparing these forms to apply your tax breaks correctly. You should note that taxes paid over.