Everything You Want to Know about Taxes
Tax liability is different for foreign nationals than it is for US residents. Here’s a quick breakdown of major distinctions:
- While federal tax on long term investments (holding property for over a year) is 15% for US residents, foreigners pay 30%.
- Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), income tax is withheld immediately after a non US-resident sells property.
- The rate varies from state to state, but the federal rate is a flat 10%.
- The IRS requires a “Statement of Withholding on Dispositions by Foreign Persons of US Real Property Interests.” In addition, many states request a “Nonresident Real Property Estimated Income Tax Payment Form.”
- We recommended seeking the expertise of a professional tax accountant to provide assistance with these forms
Consult a Tax Specialist in Your Home Country
An international buyer’s overall tax liability will also differ country to country based on the home country’s tax treaty with the US. Therefore, it’s best to consult a tax advisor in the buyer’s country of residence, who is familiar with the tax treaty and its provisions. The capital gains rate for US residents is 20% (if the property was owned for more than one year) but it could be higher if you are from certain countries. Check with a local tax specialist before you buy. In addition we can provide recommendations to local council as well.
Rental Income 101
US law requires that the foreign nationals “elect“ to pay US income taxes on any net income earned from rental property. If this election is not made in a timely fashion – and the proper forms filed with the IRS – a tax of 30% of the gross rental income will be demanded. Even if the property owner is incurring tax losses initially and doesn’t owe any taxes to the government, he or she must still file their tax returns in order to make the “election” required by law.
Get the Most from your Deductions!
The good news is that international buyers who finance their purchases with a 40 to 50% down payment will generally not pay income taxes on their rental income for the first 10 to 15 years, since the US is very generous when it comes to expenses that can be deducted from rental income. Mortgage interest, common charges, depreciation, property taxes, insurance, and amortization of closing costs can all be claimed as deductions against income, so in the early years your property will generate negative taxable income and you will not have any tax liability.
NOTE: You do not have to bin the US to Close the Deal
When the property is official closed on and transferred to the new owner, the new owner does not need to be in the US. Instead, the owner can provide his or her representative (usually an attorney) with “Power of Attorney,” and then the representative will close the deal on behalf of the new owner. This is a common practice and can be very convenient for the buyer who does not want to come back to the US for the closing. Talk to Kenton, David or Ben about that possibility if it may interest you.
Establishing an LLC
International buyers should ask themselves if it suits their interests to buy under the name of a domestic US company, or LLC (Limited Liability Company). Although there are benefits to buying through a LLC, such as tax incentives, certain treaties between a foreign country and the US can sometimes detract from those advantages. Foreign buyers should do their research ahead of time, and enlist the help of a tax adviser who specializes in international law.
Here are six things you should know about LLCs in the United States:
1. It takes one week or so to form an LLC.
2. The LLC has to be created in the same state as the property to be purchased.
3. The LLC is required by law to file local, state, and federal tax returns.
4. An LLC can include foreign nationals and US residents.
5. At the time of sale, property owners can sell or transfer shares of the LLC to a buyer.
6. A US-based LLC can be owned by a Foreign Corporation for additional benefits,
Tip- If you want to avoid the US Estate Tax
When a non US-resident dies, his or her estate will be taxed by the US government at roughly 45%. This can be avoided if the international buyer sets up a Limited Liability Corporation (LLC) – which owns the property – and a Foreign Corporation to own the LLC. Since the property in this scenario is owned by the Foreign Corporation, the US would not be able to tax it upon the death of the owner. This can be a huge tax savings and is not very expensive or time intensive to implement, especially if you solicit professional help. We have the resources to help you through the process, please call us to discuss.