Buying a €1 home in Sicily or Italy can be an incredible opportunity, but it doesn’t come without obligations—especially if you’re a U.S. citizen. While Italy may offer you a symbolic entry into homeownership, the IRS still expects you to report your foreign holdings, earnings, and capital gains with the same level of detail as if the property were located in the United States.
This guide breaks down exactly how to handle your Sicilian property on your U.S. tax return—whether you’re using it as a rental, a second home, or your primary residence.
Ownership Reporting Requirements
The good news: simply owning a foreign property in your own name does not, by itself, trigger any IRS filing requirement. You don’t need to report the physical property directly.
However, if the home is held through a foreign company, trust, or partnership, you may be required to file forms like 5471 (foreign corporation), 8865 (foreign partnership), or 3520 (foreign trust). Failure to file these can lead to steep penalties, even if no tax is due.
If you use a foreign bank account for property expenses, and your total foreign account balances exceed $10,000 at any point during the year, you must file the FBAR (FinCEN Form 114). Additionally, if your total foreign financial assets exceed $50,000 (single) or $100,000 (married), Form 8938 (FATCA) may apply.
Investment Property vs. Personal Use
The tax treatment of your €1 home depends largely on how you use it.
If you rent it out, you must report the rental income on Schedule E and pay U.S. tax on the net earnings, even if you pay tax in Italy as well. You can deduct eligible expenses such as utilities, insurance, repairs, and depreciation. Foreign real estate is depreciated over 40 years.
If you use it solely as a second home, there is no income to report, and you can’t deduct maintenance costs or depreciation. However, property taxes and possibly mortgage interest may be deductible under general rules.
If the home is used both for rental and personal purposes, you’ll need to allocate expenses proportionally based on days used for each purpose.
The Foreign Housing Exclusion or Deduction
If you’re actually living in your Sicilian property and earning income abroad, you may be eligible to claim the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion or Deduction using Form 2555.
The FEIE allows you to exclude up to $126,500 (2024) of foreign earned income. On top of that, you may also be able to exclude qualifying housing expenses such as rent, utilities, and residential maintenance, subject to location-specific caps.
This exclusion applies only if you pass the Physical Presence Test (330 full days abroad in a 12-month period) or the Bona Fide Residence Test. If you own your property, housing expenses are more limited—you cannot exclude an imputed rental value, but you may still be able to deduct utilities and certain costs associated with maintaining the home.
Selling the Property and Capital Gains Tax
Even if you bought the house for €1, the IRS will expect you to report any gain upon sale. Use Form 8949 and Schedule D to report the sale and calculate capital gains. Your cost basis includes the purchase price plus documented improvements, notary fees, and related transaction costs—all converted to USD at the exchange rate in effect on each date.
If you use the property as a second home, you are not eligible for the §121 home sale exclusion. However, if the property was your primary residence for two of the last five years, you may exclude up to $250,000 ($500,000 married filing jointly) of gain.
Like-Kind Exchanges and Foreign Property
Foreign real estate is only like-kind to other foreign real estate. You cannot exchange a U.S. property for one in Italy or vice versa. However, if you’re selling one foreign investment property and purchasing another—for example, a home in Sicily for another in Portugal—a like-kind exchange is still possible if all IRS requirements are met.
The property must be held for investment or business use, not personal enjoyment, and the transaction must follow strict identification and timing rules.
Final Thoughts
Owning a €1 home in Sicily may feel like an adventure—and it is. But as a U.S. taxpayer, you have a duty to properly classify the property and report any related income, expenses, and gains. Whether it’s a weekend house, a rental project, or your long-term retirement home, your U.S. tax obligations follow you wherever you go.
Be especially cautious if you hold the property through a foreign entity or if you earn rental income, as these introduce complex reporting requirements. Always maintain documentation for expenses, renovation costs, and any use of foreign bank accounts.
If you’re unsure how your property fits into the U.S. tax system—or if you’re planning to renovate, rent, or sell—it’s worth consulting a specialized tax advisor (that’s us!) with international experience to keep you compliant and avoid surprises down the line.
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