Does Real Estate Income Qualify for the Foreign Earned Income Exclusion (FEIE)?
If you're a real estate professional living abroad, you might be wondering whether your income qualifies for the Foreign Earned Income Exclusion (FEIE) or if you'll have to pay self-employment (SE) tax on certain earnings. The answer depends on the type of real estate income you earn and how your activities are classified by the IRS. Let's break it down.
Understanding the FEIE and Real Estate Income
The FEIE allows qualifying U.S. expats to exclude a certain amount of foreign-earned income from U.S. taxes each year ($126,500 for 2024). However, not all income qualifies. The IRS only considers earned income—wages, salaries, and self-employment income from services rendered—eligible for the exclusion. Rental income, by contrast, is typically passive income, which does not qualify for the FEIE.
Four Common Tax Treatments for Real Estate Professionals Abroad
1. You Are a Real Estate Professional with Actively Managed Rental Properties (Schedule E Income)
If you qualify as a real estate professional under IRS rules (more than 750 hours and material participation in real estate activities), you can deduct rental losses against your other income. However, your rental income remains classified as passive—meaning:
It is NOT subject to self-employment tax.
It does NOT qualify for FEIE.
Even though you're actively managing your rental properties, rental income is still considered investment income by the IRS.
2. You Own Rental Properties as a Passive Investor (Schedule E, No Real Estate Professional Status)
If you don’t meet the real estate professional status criteria and simply own rental properties that generate income, your tax treatment is even more straightforward:
Your rental income is classified as passive (Schedule E), regardless of whether you live in the U.S. or abroad.
No self-employment tax applies.
You cannot exclude this income under FEIE.
3. You Are a Real Estate Professional Earning Commissions or Management Fees (Schedule C Income)
If you work as a real estate agent or broker and earn commissions, management fees, or consulting income, this income is classified as earned income rather than passive investment income. That means:
It qualifies for FEIE if earned while living abroad.
It is subject to self-employment tax (15.3%).
If you're a real estate professional living abroad and earning commission-based income, you can exclude it under FEIE, but you should also plan for self-employment tax unless you take steps to mitigate it. (i.e. Totalization Agreements)
4. You Operate Rental Properties as a Business (Potential Schedule C Income)
If your rental activity involves substantial services beyond standard landlord duties (e.g., short-term rentals with daily cleaning, concierge services, or guest management), the IRS may classify your income as business income rather than passive rental income. In this case:
Your income may qualify for FEIE because it is considered earned.
However, it is also subject to self-employment tax.
This classification is common with Airbnb hosts or those who operate furnished short-term rentals with hotel-like services.
Advanced Strategy: Creating a Property Management Business for FEIE Eligibility
One way to legally shift rental income into earned income (making it eligible for FEIE) is to create a property management business and charge your rental properties for management services. Here’s how it works:
Set Up a Property Management Business (Schedule C Income)
Form a sole proprietorship, LLC, or corporation that provides property management services for your own rental properties.
Charge management fees to your rental properties for services like advertising, tenant placement, maintenance coordination, and rent collection.
These fees are considered earned income, making them eligible for FEIE (if you're abroad).
However, this income is subject to self-employment tax (SE tax).
Rental Properties Pay Your Property Management Business
Your rental properties (Schedule E) pay your property management business (Schedule C) for services.
On Schedule E, these payments are deducted as an expense, lowering taxable rental income.
Your rental income remains passive and not subject to self-employment tax, while a portion of the income is converted into earned income that qualifies for FEIE.
Tax Considerations
The IRS requires reasonable management fees—excessive fees could be challenged.
A properly structured LLC or foreign corporation may provide additional benefits, such as reducing SE tax.
If using a foreign corporation, additional compliance (e.g., Form 5471) may apply.
Final Takeaways
Rental income (Schedule E) is not earned income and does not qualify for FEIE, even with active management.
Real estate professionals earning commissions or management fees (Schedule C) can exclude their income under FEIE but must pay self-employment tax; unless they have a Certificate of Coverage from a foreign country proving that they pay social security there.
If your rental activity includes substantial services, it may be classified as a business and be subject to SE tax, but also qualifies for FEIE.
You can create a property management business and shift some income to earned income, allowing it to qualify for FEIE while deducting the management fees from rental income.
If you're a real estate professional abroad and want to optimize your tax strategy, it's essential to understand these distinctions. Feel free to reach out if you need personalized tax advice on structuring your real estate income efficiently!