US real estate tax can have a serious impact on the amount of profit made through the purchase and sale of property in the USA. It’s a topic that all foreign investors need to understand in order to be invest successfully in the USA.
In total, a foreigner investor needs to consider three main areas when it comes to tax; income, capital gains and inheritance tax. The laws are quite complex and require a good international tax attorney, but here is a brief overview.
Income Taxes: If you end up renting your property, you will need to pay income tax. As a foreign real estate investor, you can simply choose to have the gross income taxed, currently at a rate of 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.. Nevertheless, your country may have special treaties with the USA where the flat rate is actually 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: When you sell your real estate, capital gains tax is due. In order to ensure compliance with payment, the US government has established FIRPTA which stands for Foreign Investors Real Property Tax Act. 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. Once a return is filed, the money is used toward the taxes owed, or refunded if necessary.
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 you die owning property in the US, your estate will have a hefty inheritance tax burden. Foreign individuals are not allowed the usual exclusion given to US residents. However, you can avoid this tax by establishing entities offshore 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.