How does US tax work on Bali property?

Americans face a tax position on foreign property that no other nationality does, and the reporting rather than the tax is what causes the problems.

Citizenship-based taxation

The United States taxes its citizens and permanent residents on worldwide income, wherever they live.

This is close to unique. A British, Australian or German citizen who genuinely relocates ceases to be taxed at home on worldwide income. A US citizen does not, no matter how long they live in Bali or how completely they leave.

Moving to Indonesia does not change your US filing obligation. It adds an Indonesian one.

The income position

Indonesia taxes Bali rental income first. A final tax of ten percent for an Indonesian tax resident individual, twenty percent for a non-resident, on gross rental income — plus the regional accommodation tax on short-term letting.

The US taxes the same income, computed under US rules — net rental income after allowable expenses, with US depreciation rules applying to the property.

Foreign tax credit relieves double taxation, limited to the US tax attributable to that foreign income, with carryback and carryforward available for excess credits.

Note the mismatch: Indonesia's final tax is on gross, the US taxes net. In a year with heavy expenses or depreciation, US taxable income may be low while Indonesian tax on gross was substantial.

The foreign earned income exclusion does not apply to rental income. It applies to earned income from personal services, not to passive property income, and this is a common and expensive misunderstanding.

The reporting, which is the real issue

This is where Americans get into trouble, and the penalties are severe relative to the amounts.

FBAR. If the aggregate value of your foreign financial accounts exceeds the threshold at any point in the year, you file FinCEN Form 114. An Indonesian bank account holding rental income counts. Penalties for non-filing are substantial and apply even where no tax was due.

FATCA / Form 8938. Reporting of specified foreign financial assets above thresholds that vary with filing status and residence.

Form 5471, if you hold an interest in a foreign corporation — which a PT PMA is. This is a demanding form with serious penalties for non-filing, and it catches Americans who set up an Indonesian company on local advice with no US input.

GILTI and Subpart F, which can attribute a foreign corporation's income to you whether or not it is distributed.

Form 3520 in some trust and gift circumstances.

Foreign real property held directly is generally not itself a reportable financial asset, but the accounts and entities around it are.

The PT PMA problem specifically

An American forming a PT PMA to hold Bali property is creating a controlled foreign corporation with US filing obligations, potential income attribution and a compliance burden that frequently exceeds the benefit of the structure.

This is set up in Indonesia constantly by advisers with no visibility of the US side, and discovered later by a US preparer.

Get US advice before forming any Indonesian entity. For many American buyers, holding a leasehold personally is considerably simpler than a company, and the simplicity is worth real money.

Capital gains

US capital gains tax applies to the disposal, computed under US rules, with credit for the Indonesian final tax of 2.5 percent of transfer value.

Depreciation recapture applies to rental property, which surprises people — depreciation claimed during ownership is recaptured on sale at a higher rate.

Indonesia taxes the sale value even on a loss, while the US taxes the gain, so a loss-making sale can produce Indonesian tax with no US liability to credit it against.

Renouncing

Some Americans abroad consider it. It carries an exit tax on unrealised gains for covered expatriates, and it is irrevocable.

It is a large decision with consequences far beyond tax, and it is not a property planning tool.

What to do

File. Both the returns and the information reports. The information return penalties are the ones that hurt.

Get US advice before buying and before forming any entity, not at the end of the tax year.

Use a preparer who handles foreign property and foreign entities, not a general one.

Keep records in both currencies with exchange rates and evidence of Indonesian tax paid.

Do not assume moving solves it. It does not, and that is the whole point.