https://youtu.be/zPJdDcRVte4?si=IEyFn8sFj8A8i7_d
As we often discuss here at Advise RE, investing in real estate internationally introduces an entirely new layer of tax complexity. One of the most common areas where U.S. investors get tripped up is the assumption that a “tax-free” country means a tax-free investment.
Dubai is the perfect example.
While Dubai offers zero local income tax, Golden Visas, and attractive rental yields, U.S. citizens are still subject to U.S. tax law on their worldwide income. This disconnect between local tax benefits and U.S. reporting rules creates what we often call the “tax-free trap.”
Let’s break down how this actually works under U.S. tax law—and where investors get into trouble.
The Core Rule: The U.S. Taxes Worldwide Income
For U.S. citizens and green card holders, the IRS taxes worldwide income, regardless of where the property is located or whether foreign tax is paid.
Dubai imposes no income tax on rental income. However, because there is no U.S.–UAE tax treaty, U.S. investors cannot rely on foreign tax credits to offset U.S. tax. In many cases, this results in fully taxable U.S. rental income with no foreign tax relief.
In other words, “tax-free” locally does not mean tax-free federally.
Depreciation: Why Foreign Property Uses a 30-Year Schedule
One of the most misunderstood issues with foreign real estate is depreciation.
U.S. residential rental property is typically depreciated over 27.5 years using the General Depreciation System (GDS). Foreign residential rental property does not qualify for this treatment.
Instead, foreign property must be depreciated under the Alternative Depreciation System (ADS) over 30 years.
The result is a slower depreciation deduction, higher taxable income each year, and reduced tax efficiency compared to U.S.-based rentals.
Foreign Bank Accounts: FBAR and Form 8938
Owning property in Dubai almost always involves holding money overseas—whether that’s rental income, security deposits, or operating funds.
Once certain thresholds are met, U.S. taxpayers are required to file:
FBAR (FinCEN Form 114)
Form 8938 (FATCA reporting)
These forms are informational, but the penalties for failing to file are severe—often starting at $10,000 per violation, even when no tax is owed.
Many investors assume these filings only apply to “large balances.” That is not always the case.
The Free Zone Company Mistake
Another common issue we see is investors being advised to hold Dubai property inside a Free Zone entity.
For U.S. taxpayers, this can trigger Form 5471, one of the most punitive information returns in the tax code. Failure to file Form 5471 correctly can result in penalties of $10,000 or more per year, per entity.
In many cases, the entity structure provides little to no U.S. tax benefit while dramatically increasing compliance risk.
Selling the Property: Capital Gains Still Apply
Dubai does not impose capital gains tax on real estate sales. The United States does.
When a U.S. citizen sells a Dubai property, the gain is fully reportable on their U.S. return and subject to U.S. capital gains tax, depreciation recapture, and applicable surtaxes.
The lack of local tax does not eliminate U.S. tax exposure.
The Bottom Line
Dubai can be an attractive real estate market—but it is not inherently tax-efficient for U.S. citizens without proper planning.
Foreign depreciation rules, worldwide income taxation, reporting requirements, and entity structuring mistakes can easily turn a “tax-free” investment into a compliance and tax nightmare.
The most important planning happens before the purchase, not after the money is wired.
TRANSCRIPT (Excerpt)
Welcome back everybody. Stephen Morris here with Advise RE. Today we’re talking about buying real estate internationally—specifically Dubai—and why the idea that it’s tax-free for U.S. citizens is one of the biggest misconceptions we see.
Dubai may be tax-free locally, but the U.S. taxes worldwide income. There’s no treaty, no foreign tax credit, and foreign property has different depreciation rules. On top of that, you have FBAR filings, FATCA filings, and potentially Form 5471 if you use a foreign entity.
All of these things matter before you buy—not after. If you don’t plan correctly on the front end, the penalties and lost deductions can be significant.
Thank you so much for watching. If you have questions about international real estate or tax planning, feel free to reach out to us directly.
