Cross-Border Real Estate & U.S. Taxation: How One Mistake Could Have Cost Thousands — And How We Fixed It

Owning property abroad can be exciting — but when it comes to U.S. taxes, it can get complicated fast.
Recently, I worked with a client who owned several rental properties in Spain, and what we uncovered is something I see far too often in cross-border tax cases:
complex structures, missing disclosures, and serious IRS exposure — all completely avoidable with the right guidance.

The Problem: A Complex Structure With Missing U.S. Tax Reporting

My client had purchased multiple rental properties in Spain over several years. Their previous accountant failed to issue key disclosures, and to make things more complicated, the client had moved the properties from individual ownership into a Spanish corporation.

This triggered a completely different set of U.S. tax rules, including:

• Form 5471 (foreign corporation reporting)
• Subpart F and GILTI exposure
• Foreign rental income classification
• FBAR and FATCA (Form 8938) reporting
• Potential double taxation between Spain and the U.S.

If left unaddressed, this could have created:

Incorrect capital gains reporting
Harsh U.S. anti-deferral rules
Penalties for missing foreign entity filings
Double taxation on rental income
A messy audit trail and years of corrections

This situation is more common than people think—especially when real estate is transferred into SL companies (Spanish corporations) without understanding U.S. consequences.

How We Fixed It (and Protected Their Long-Term Tax Position)

Together, we took a structured, strategic approach:

1. Corrected all missing U.S. reporting and disclosures

We reviewed every foreign asset, every year of income, and every entity-related filing.
This included catching up on:

• FBAR
• FATCA
• Form 5471
• Rental income reporting
• Foreign tax credits

2. Analyzed U.S.–Spain tax treaty interactions

The U.S.–Spain tax treaty contains key provisions on double taxation, rental income, corporate structures, and capital gains.
Understanding these rules allowed us to properly allocate income and reduce unnecessary tax exposure.

3. Simplified the structure for future compliance

We re-evaluated the decision to hold real estate in a corporation and created a plan that:

• Minimizes reporting burdens
• Reduces IRS audit risk
• Avoids unnecessary GILTI exposure
• Provides clarity for capital gains in the future

This transformed a tangled, risky situation into a clean, compliant, and manageable structure going forward.

Why Foreign Property Creates Unique U.S. Tax Challenges

Owning real estate abroad can trigger several U.S. tax obligations many clients aren’t aware of:

• Foreign corporation reporting (5471)
• Foreign rental income rules
• Foreign tax credit coordination
• FBAR / FATCA asset reporting
• Currency translation for income & cost basis
• Different depreciation schedules (Spain vs. U.S.)

Spain’s tax rules are very different from U.S. rules — and if you apply U.S. logic to Spanish real estate, or vice-versa, things fall apart quickly.

This is where expertise matters.

The Real Lesson: Clarity Reduces Risk

This case reminded me of something important:
cross-border real estate isn’t just about numbers — it’s about having a clear, strategic approach.

When the rules get complicated, clarity becomes your best protection.

Whether you own a rental property in Spain, Portugal, Thailand, Mexico, or anywhere else, the right guidance helps you:

• Stay compliant
• Avoid penalties
• Reduce double taxation
• Plan for smarter capital gains outcomes
• Build wealth internationally with confidence

Thinking About Buying or Already Own Property Abroad?

If you’re navigating foreign rental income, foreign corporations, or cross-border reporting, don’t guess — and don’t wait until tax season to address the issues.

I’ve helped many clients simplify and correct their foreign real estate tax structures, and the peace of mind that comes from doing it properly is priceless.If you’d like help reviewing your international real estate tax structure, you can schedule a session below:
https://calendly.com/mariyaluqmanicpapc/15