Can You Claim Taxes on a Home in Puerto Rico That You Inherited?

By Jeff Franco J.D./M.A./M.B.A.

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.

Get a free, confidential bankruptcy evaluation. Learn More

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.

Get a free, confidential bankruptcy evaluation. Learn More
How to Will Your Home to a Relative So They Don't Pay Inheritance Tax


Related articles

Why Is a Sole Proprietor Not Entitled to a Tax Deduction for Salary Payments to Himself?

When choosing to operate your business as a sole proprietorship, no legal entity exists that separates your business and personal activities – which is why you need to operate the business in your personal name. For tax purposes, the Internal Revenue Service treats your sole proprietor earnings as self-employment income, reportable on your personal tax return and for which you’re solely responsible to pay tax on as your income. However, self-employed taxpayers are never entitled to deduct their own “salary” payments.

Buying Personal Property for a Sole Proprietorship

A sole proprietorship is a non-incorporated business entity wholly owned by a single individual. The sole proprietor has the right to make any and all decisions regarding business operations, including the purchase of equipment, goods and materials necessary for running the business. A sole proprietor may purchase property for both personal and business use through his own name or through the name of his business. However, only personal property used in direct relation to business operations is viewed as a tax-deductible business expense.

Submitting Taxes to a Trustee After Bankruptcy in Florida

When you file for bankruptcy in Florida, you are required to provide the bankruptcy trustee with a copy of your latest income tax return. If you file for Chapter 13 bankruptcy, you are required to provide copies of all income tax returns filed while the case is pending. If you are due a refund, it may or may not be yours to keep.

Related articles

How Do Donations to a 501(c)(3) Work in Taxes?

Contrary to popular belief, tax laws aren’t designed just to raise revenue to fund the government. Tax policies are ...

Deductible Expenses in a Sole Proprietorship

When you earn income through a sole proprietorship, you report it on a tax return a little differently than an employee ...

Tax Consequences of Selling an Inherited Home

If you sell an inherited home, you have to share the news with Uncle Sam because you'll owe income taxes if you have a ...

How to File Taxes After Divorce

Going through a divorce and dealing with all the personal changes it brings is never easy. Unfortunately, you’ll also ...

Browse by category
Ready to Begin? GET STARTED