Rental Property in California - Tax Situation?

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We want to buy rental property in California. Do we declare earnings in Germany and also the US and pay taxes on any income in California? I am a US citizen, work and pay taxes in Germany. File in US too, but only federal taxes until now. Also, is it better in this case to get the loan in the US or in Germany? Where can we claim the mortgage as a tax deduction? Thank you for any insights. 

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You must declare the rental income in Germany too, and it will increase your German tax. Progressionsvorbehalt.

I think it will be impossible (or at best, difficult and overexpensive) to get a loan in Germany for it.

 

Can I ask you why you want to invest in property rental in California?

I thought the common view was that property there is overinflated. I mean, even more overinflated than other types of assets like the stock market, which has the advantage of lower costs, less hassle with tenants and maintenance etc, and it's more liquid (you can't sell 13% of your house with a mouse click...). I also have a rental property abroad, but I got it 'accidentally', I would not have done it as a strategy. Especially if one does not have a large surplus of cash and needs a loan.

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well - technically, if you need to finance that rental property in CA, your lender should be local (or at least in the US) for this to be less of a nightmare as far as taxes goes. I don't think it will be easy to find a lender in CA if you don't have an address, income, and a credit history there. I also think it will be next to impossible to find a lender in Germany willing to finance real estate in CA for you.

 

Because you are a US citizen, your rental income needs to go on your tax returns to the IRS. 

Here's what these folks want you to do:

https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping

 

And, because you are living in Germany, your US rental income has to be declared for Progressionsvorbehalt.
Here's what Finanzamt requires:

https://www.capital.de/immobilien/muessen-feriendomizile-in-deutschland-versteuert-werden

 

In general my recommendation would be to keep your real estate investments close to where you live - makes things easier to manage.

And, yes, I too am extremely curious to know why?? would you want to finance rental property in CA while living in Germany.

 

I do understand that, being a US-citizen living outside of the USA, real estate is the easiest investment opportunity - but you'd want to have that rental property in your country of residence. Especially if you need financing.
 

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