If you inherit a home in Puerto Rico and plan on using it as a personal residence or rental property, you’ll inherit an annual property tax bill as well. But if you file a U.S. tax return, you may be able to claim those taxes as an itemized deduction. However, the more difficult task is determining whether you need to file a U.S. tax return in the first place.
U.S. Taxation of Puerto Rico
The U.S. tax law treats Puerto Ricans as U.S. citizens for purposes of collecting income taxes. Even if Puerto Rico is the only place you’ve ever called home, you may still need to file a U.S. return and pay tax, but you can also take advantage of the deduction for real estate taxes on your home despite the fact you pay them to Puerto Rico. However, special rules apply that may allow you to exclude your earnings from Puerto Rico.
Bona Fide Resident
The IRS uses a concept known as “bona fide resident” rather than citizenship to determine whether you’re eligible to exclude your Puerto Rican income, such as rental income you may earn from the home you inherit, from U.S. income tax. You are considered a bona fide resident if you’re physically present in Puerto Rico for at least 183 days during the tax year and don’t have a tax home outside of Puerto Rico. The term "tax home" refers to the country in which your main place of business or employment is; if you're not employed, it refers to the place where you typically live.
Claiming Foreign Property Taxes
If you determine that you’re not a bona fide resident of Puerto Rico and your annual earnings are equal to or more than the sum of your standard deduction and personal exemption, you must file a U.S. tax return that reports all income, irrespective of the country you earn it in. However, if you choose to itemize your deductions, the tax law allows you to claim a deduction for property taxes on any personal residence you own, including the home you inherit in Puerto Rico. In most cases, it’s only beneficial to itemize if the total of your itemized deductions reported on Schedule A exceeds the amount of your standard deduction. But if you rent the home and report all rental income on the return, your Puerto Rico property taxes are fully deductible on Schedule E, regardless of whether you itemize or claim the standard deduction.
Allocating Tax Deduction
When the IRS treats you as a bona fide resident of Puerto Rico, you may encounter limitations on your property tax deduction. This is because you can exclude all earnings from Puerto Rico. In this case, you need to allocate your property taxes between your excluded Puerto Rican income and your taxable U.S. income tax. For example, if only 20 percent of your income is subject to U.S. income tax and you use the home as a personal residence -- only 20 percent of your property tax payments are deductible on your U.S. return. However, if you rent the home, you can’t claim the deduction, because the property tax payments solely relate to your excluded rental income.
- U.S. Congress Joint Committee on Taxation: An Overview of the Special Tax Rules Related to Puerto Rico
- IRS: Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad; Nov 2010
- IRS: Instructions for Schedule A
- IRS: Publication 527 - Residential Rental Property
- IRS: Publication 1321 – Special Instructions for Bona Fide Residents of Puerto Rico
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.