Foreign Property and Special U.S. Depreciation Rules

Earlier this month, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law.  The act extended certain tax credits and made others permanent several tax provisions that were typically extended for one year.  One of the provisions of the PATH Act extended bonus depreciation for property placed in service between 2015 – 2019; .  The Path Act also continues to allow taxpayers to accelerate alternative minimum tax credits rather than use bonus depreciation.  However, bonus depreciation is not applicable to foreign properties.

Individuals with foreign real estate should be aware of the special depreciation rules for foreign real estate.  Internal Revenue Code § 168 covers the rules for depreciation, including the method, period and percentages.  While U.S.-based assets are covered under the General Depreciation System, tangible property that is used predominantly outside the United States is covered under the Alternative Depreciation System.

The Alternative Depreciation System is determined by using the straight line method, the applicable convention depending on the type of property and a recovery period of 12 years for personal property with no class life and 40 years for both non-residential real property and residential rental property.

It is prudent then for individuals with foreign assets to be aware of the special rules for depreciation for those assets and make certain they are in-line with the Alternative Depreciation System rather than the General Depreciation System.