subject: How Us Real Estate Tax Impacts On Foreign Investors [print this page] US Real Estate Tax is a major consideration for foreign investors. While the US market is currently viewed as offering the best opportunity for profitable investments, how a sale is structured and taxed determines the true amount of profit to be had.
In total, a foreigner investor needs to consider three main areas when it comes to tax; income, capital gains and inheritance tax. US laws are not simple to understand and you may require the assistance of a good international tax attorney. Nevertheless, here is a short overview.
Income Taxes: If you end up renting your property, you will need to pay income tax. If you are a foreign investor, you can decide to have the gross income taxed, which is currently at 30%. If you decide to go ahead with this basic flat rate, deductions for things such as maintenance, mortgage interest and utility payments are not permitted.. There is, however, the possibility that your country has treaties with the US that would make the flat rate less than 30%.
A better, and more popular alternative, is to treat investments in US real property as a trade or business. This allows you to be taxed on net income rather than gross, which can greatly reduce your US Real Estate Tax bill.
Capital Gains Tax: Capital gains tax needs to be paid when you choose to sell your real estate. The US government has created FIRPTA (Foreign Investors Real Property Tax Act) to ensure compliance with payment. It requires the buyer to take 10% from the sales price and send it directly to the Internal Revenues Service as down payment for taxes due. After filing your return, the money may be used to pay taxes owed or it may be refunded.
There are some instances where FIRPTA does not apply. For instance, if you choose to exchange your property for another similar property in the US, called a 1031 exchange, you would be exempt. Another common scenario which allows a FIRPTA exemption is when the buyer is going to use the property as their personal residence and the sales price is less than $300,000.
Inheritance Tax: If, by chance, you pass away whilst owning real estate in the US, your estate will have a significant inheritance tax burden. The normal exclusion given to US resident is not given to foreign residents. This tax can be avoided, however, by creating offshore entities, like a holding corporation, to own the property.
There exist certain investment structures which can be put into place to help reduce or eliminate the amount of tax paid. The key is to find a skilled International tax accountant, and discuss the US Real Estate Tax, as well as the pros and cons of each structure, prior to investing in the market.
by: Martin Sejas
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