Foreign rental property depreciation on an Indian flat runs 30 years, straight line, under the Alternative Depreciation System (ADS), not the 27.5 years a US landlord uses. Claim 27.5 and you overstate your deduction every year. Skip depreciation altogether and the IRS still reduces your basis as if you'd taken it.
How foreign rental property depreciation works under ADS
Section 168(g)(1)(A) of the Internal Revenue Code sends property used mostly outside the United States to ADS. That one rule is why your Pune flat isn't on the 27.5-year schedule a Texas landlord uses.
ADS depreciation has three features you'll use on every return:
- Straight line with no salvage value, so every full year takes the same amount.
- Thirty years for a residential rental building, such as a flat let out as a home.
- A mid-month convention, so the first year counts from the middle of the month you start renting.
The 30-year period applies to buildings first available for rent after 2017. Older property generally runs 40 years, with a few exceptions, so check your start date before you pick a schedule.
What the schedule looks like in dollars
Priya is a US tax resident who bought a flat in Pune and started renting it in July. After removing the land, the building cost her $120,000 at the exchange rate on the purchase date.
- ADS deduction: $120,000 ÷ 30 = $4,000 a year.
- First year: July counts as 5.5 months, so $4,000 × 5.5 ÷ 12 = $1,833.
- The 27.5-year schedule would give $4,364 a year, which is $364 too much.
That $364 gap repeats every full year, and each return carrying it needs correcting.
Split the land from the building first
Foreign rental property depreciation covers the building only. Land generally doesn't wear out, become obsolete or get used up, and IRS Publication 527 says you can't depreciate its cost.
An Indian sale deed shows one price, so you do the split yourself. For a flat, the land is your share of the plot under the building. Use a reasonable basis, such as a valuation, and keep the working with your records.
Convert the building cost to dollars at the exchange rate on the purchase date. Convert rent and expenses at one annual average rate, and use it consistently.
Depreciation catches up when you sell
You reduce your basis by the depreciation allowed or allowable, whichever is greater, even if you never claimed it. So the skipped years don't spare you. The basis falls anyway, and your US gain grows by the same amount.
The slice of gain that matches the depreciation is unrecaptured section 1250 gain, taxed at up to 25%. India works out its own gain separately, so the two figures rarely match.
Here's what that costs Priya if she sells after five years of rent:
- Depreciation allowed: $1,833 + 4 × $4,000 = $17,833.
- Most the IRS taxes that slice at: 25% × $17,833 = $4,458.
A US citizen or resident reports the sale on the US return, and the Indian tax comes back as a foreign tax credit. The buyer withholds Indian tax on the full sale price, so planning the sale before you sign matters.
Moving the money to a US account is a separate step. Repatriating from an NRO account is capped at USD 1 million per financial year, so selling property in India needs that paperwork lined up too.
Who this applies to
If you're a US citizen, green card holder or resident alien, your worldwide rent is on your US return. ADS applies to any Indian building you let out.
If you've moved back to India and you're a nonresident alien for US tax, Indian rent is foreign-source income and the US doesn't tax it. The year you move is usually dual-status, so that return needs a preparer.
The property type changes the period. A flat let out as a home is residential rental property, meaning a building with 80% or more of its rent from dwelling units. A shop or an office is nonresidential real property, and ADS gives it 40 years.
Two cases need a professional. One is a flat you started renting before you became a US tax resident, where the starting basis is a judgment call.
The other is property first rented before 2018, where the period can be 40 years or, in some cases, 30. I'd settle both before filing, because they set the number you carry for decades.
What to do about it
Work through these in order:
- Find the purchase deed and work out the building share of the price, using a valuation if the deed gives one price.
- Convert that building cost to dollars at the purchase-date rate.
- Pick the month the flat was first available to rent, because the 30 years starts there.
- Enter the deduction on Schedule E each year, and attach Form 4562 in the first year, using the ADS section of Part III.
- Claim the Indian tax on the rent, including tax the tenant deducted at source, on Form 1116 in the passive income category.
This guide covers the US side only. How India taxes the rent itself, including TDS and the Indian return, sits in the guide to NRI rental income tax. Read it alongside this one before you file.
India and the US do have a tax treaty. Under the US-India tax treaty, the country where the flat sits has the first right to tax the rent, and the US gives a credit for the Indian tax.
If earlier returns used 27.5 years, fix it. One return can usually be corrected with Form 1040-X. If you used the wrong schedule on two or more consecutively filed returns, the IRS treats it as a method you adopted, and you change it with Form 3115 instead.
I'd claim the 30-year deduction every year, even when the rent barely covers your costs, because your basis comes down whether you claim it or not.
Your first move
Pull your purchase deed and your last three Schedule E filings, and check which depreciation period each year used. If it's 27.5, I'd correct it before the next filing rather than after a notice. InvestMates can review the schedules and prepare the fix if one is needed.
Frequently asked questions
Do I have to report foreign rental property to the IRS?
Yes, you report foreign rental property to the IRS if you're a US citizen or resident. The rent and expenses go on Schedule E whether or not the money reaches the US.
The property itself stays off Form 8938, but the account that receives the rent can need an FBAR. That applies once your foreign accounts total more than $10,000 at any time in the year.
Do I file Form 4562 every year for my Indian rental property?
No, Form 4562 is filed for property placed in service during the tax year, so you attach it in the year the flat is first available to rent. After that, you carry the same annual ADS deduction to Schedule E each year.
Do I still claim depreciation on Indian rental property that produces a loss?
Yes, you still claim depreciation on Indian rental property that produces a loss, because the basis falls whether or not you claim it. The loss itself may be limited by the passive activity rules.
Those rules allow up to $25,000 against other income if you actively participate. The allowance phases out between $100,000 and $150,000 of adjusted gross income, and a disallowed loss carries forward.
Can I use Section 179 to deduct my Indian rental property in one year?
No, Section 179 excludes property used mainly outside the United States, so an Indian flat goes on the 30-year ADS schedule instead.