Having a UAE rental property may seem like a local investment, particularly if it is your home. The income remains within the US tax system, however, for a U.S. citizen. In general, Americans residing overseas will be taxed on their global earnings, meaning that rent from a Dubai apartment or Abu Dhabi villa could also be considered US income.
Let’s say Sarah is a citizen of the United States and resides in Dubai and owns a 1-bedroom apartment in Business Bay. During 2025, it brings in AED 120,000 of gross rent. If someone is searching for a trusted US expat tax service in the UAE, then Sarah’s example is helpful because the property is fairly standard by UAE standards, but her US reporting isn’t a mere carbon copy of what she was filing at home.
Sarah still reports the UAE rental income in the US
This does not mean that Sarah’s rent is not taxable in the US because both she and the property are in Dubai. Rental income and expenses on a rental property are generally considered under United States rental property rules, and income earned by a U.S. citizen and resident alien in another country is generally reported as income in the United States.
There is no personal income tax in the UAE. Furthermore, the Federal Tax Authority indicates that any real estate investment income that a natural person earns is not considered a business or business activity for UAE Corporate Tax purposes.
The rent may be relevant to her US return, but she won’t have a UAE income tax bill on it because of Sarah. Even if the property is held in a company or another business structure, there may be other questions, as ownership matters.
Her US rental profit is more than rent minus bills.
If Sarah earns AED 120,000 and spends AED 25,000 on management, repairs, insurance, and other property expenses, what is her savings? If Sarah earns AED 120,000 and costs for property management, repairs, insurance, and other property expenses are AED 25,000, what is her savings? She can no longer deduct all of her payments from the rent and must consider the balance to be her taxable profit in the United States.
Deductibility and treatment of rental expenses are governed by U.S. rules. Depreciation is one of the areas that is very easy to overlook. Property that is used primarily outside the United States is subject to the Alternative Depreciation System (ADS), and residential rental property placed in service after 2017 has a 30-year ADS recovery period.
Despite having a tidy annual report from her Dubai property manager, Sarah still requires a US calculation using US rules.
The Foreign Earned Income Exclusion usually does not solve the rental-income issue.
One appealing notion for Americans living in the UAE is that the Foreign Earned Income Exclusion (FEIE) applies to anything earned abroad. It’s not the way the exclusion is supposed to operate.
The FEIE is only for foreign earned income earned from work performed outside of the United States. Hands-off rental investments are typically not considered personal services income. Therefore, merely owning an apartment and collecting rent is not considered foreign earned income.
In Sarah’s case, the UAE likely won’t provide much relief from the Foreign Tax Credit,t as the country usually doesn’t levy individual income taxes on rental income. For most cases, a Foreign Tax Credit is only available if the foreign income tax is qualified, or if certain taxes are paid instead of a foreign income tax.
This means that a greater proportion of the rental income is subject to US federal income tax as compared to what some UAE-based expats may expect.
Dirhams still have to become US dollars.
Sarah earns rent in AED, and has a US return that is computed in dollars. The foreign currency amounts must then be translated into dollars and cents.
The correct rate may vary according to the item and time considered. The IRS offers exchange-rate tools, but doesn’t require that the same exchange rate be used for every foreign-currency transaction. It will make the conversion much easier in the future should it be necessary, if the original AED amounts and transaction dates are kept.
Selling the UAE property creates a second US calculation
Once Sarah eventually sells the apartment, the annual rental income becomes a U.S. question of whether a gain or loss on the property occurs.
The calculation for U.S. purposes is normally based on the adjusted basis of the property and the amount realized from the sale. The amount of depreciation recorded in the rental years may impact the final US tax outcome since it is a reduction to adjusted basis.
There is another complication with currency. The corresponding amount will be calculated in US dollars, although Sarah can purchase and sell the property in dirhams. The US-dollar benefits might be different after some years when exchange rates fluctuate, but the result may not be the same as the one she sees when comparing the purchase and sale prices, in AED.
The assumption that transaction and/or registration fees in the UAE are automatically deemed to be foreign taxes is not the case either; the IRS has certain tests for what constitutes foreign taxes.
Keep the property history from day one.
Sarah should store purchase records, improvements, rental statements, service-charge records, repair bills, depreciation schedules, and sale documents. Those records facilitate annual rental reporting and help determine the adjusted basis of the property at the time of the sale.
With US reporting, depreciation, currency, and eventual sale implications all potentially relevant, Expat US Tax can help pre-review how an easy local investment can become a more complex cross-border filing issue.
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