There are tax implications for practically every type of transaction. One area of the tax code that can get particularly complicated is the transactional tax issues from buying real estate or businesses in the United States while you are living abroad. For U.S. expatriates and foreign nationals, the tax implications of these transactions must be handled carefully to avoid causing any unwanted tax problems.
The U.S. real estate market is an attractive financial option for foreign investors seeking to stabilize, strengthen, or diversify their portfolios. Income and withholding tax requirements imposed by the IRS for these transactions are complex. Failure to follow the complicated declaration procedures could result in additional penalties plus interest. You may need a skilled tax CPA to manage your affairs if you have rental income from U.S. properties or U.S. real property investments as a foreign taxpayer.
For help from our tax CPAs for transactional tax issues at US Tax Help, call us today at (541) 362-9127
Owning US Situated Real Estate or Businesses as a Foreign National
A foreign national or non-resident alien is not a U.S. person and can be a foreign individual, foreign corporation, foreign estate, or even a foreign trust. There are various taxes that you should be aware of if you own real estate or a business in the United States as a foreign national, as well as exemptions you can claim to lower your tax burden while remaining compliant.
Estate Tax for Foreign Persons
A foreign person or expat should be aware of all tangible and intangible property in the United States that they can be taxed on. Foreign nationals may owe estate taxes on ownership or control of real estate in the U.S., stock in a U.S. corporation, interest in a U.S. partnership, interest in a U.S. trust, and holding a debt obligation of a U.S. person.
Currently, there is a $60,000 estate tax exemption for foreign nationals who own property in the United States at the time of their death. Depending on the country you reside in, a tax treaty may limit your estate tax if you are a foreign national. There may also be state tax laws that you must adhere to depending on where in the U.S. your property is situated.
The estate and gift tax exemption is $13.61 million per individual for 2024, up from $12.92 million in 2023. That means an individual can leave $13.61 million to heirs and pay no federal estate or gift tax, while a married couple can shield up to $27.22 million. The annual gift exclusion amount is $18,000 in 2024.
The current estate tax exemption for American citizens, residents, and expatriates will expire on January 1, 2026, and be reset to a $5 million exemption, likely adjusted for inflation, unless new legislation passes addressing the matter. Those with large estates can take steps to start planning to take advantage of exemptions as they stand now and prepare for possible reductions to the estate tax exemption in the coming years.
Tax on Income from Property Owned by Non-Resident Aliens
Suppose you are a non-resident alien and own property in the United States for the sole purpose of using it as a personal residence. In that case, your income tax consequences are likely minimal. However, if you own property in the U.S. and use it to generate income, you are subject to income tax.
Rent is one of the most common U.S. sources of income that a non-resident alien (NRA) will deal with if they own property in the United States. An NRA can also be taxed on dividend income from a corporation that is incorporated within the United States. Depending on your circumstances, there may be an exception to dividend income taxation. As mentioned above, if you have an interest in the debt of a U.S. resident, it will be considered U.S. source income.
Regardless, our tax CPAs can help you sort through which of your U.S.-situated properties are subject to taxation and determine whether there is a way to minimize the effects of that taxation.
Tax on Income from a US Trade or Business Earned by Non-Resident Aliens
Non-resident aliens are taxed like U.S. resident aliens and citizens regarding activities or assets used in a U.S. trade or business. This means that income is taxed at a graduated rate that will increase or decrease depending on the income derived from the business. The tax code does not exactly define what a trade or business is; instead, the IRS looks at the type of activities and economic interests that the business has within the United States.
Income derived from a U.S. trade or business can be income made from operating a business in the U.S., income gained from selling capital assets of a business in the U.S. or real property, money earned from performing a personal service within the U.S., income from real property that is used as a business or held for investment, and the income derived from a partnership dealing with a U.S. trade or business.
If a foreign national does not operate a U.S. trade or business but continues to reap profits from a business, their profits may be taxable.
It is also important to note that the federal government does not restrict foreign nationals’ real estate ownership. However, some states may impose some restrictions on the right to own or invest in property. For example, some states may deny the right of a foreign national to inherit real estate, while others might prevent them from owning agricultural land. While some tax treaties can invalidate several of these rules, you should have a foundational understanding of a state’s laws before purchasing property there.
Responsibility of Foreign Property Owners to Pay Taxes in the US
If you own and rent out real property in the United States, the IRS will require you to pay taxes on income received from the property regardless of your specific tax status. It will not matter if an income treaty exists with the foreign country where you live and the United States. Filing taxes based on the income you receive from renting property here in the United States requires extensive filing documents, including Form 1042-S.
Your gross income from U.S. rental properties as a foreign national is subject to a 30 percent withholding requirement. This can be substantially reduced with the proper elections and application of tax treaty provisions.
In reality, many taxpayers, whether U.S. citizens or not, need help properly cataloging line items to maximize their tax deductions and could make simple mistakes that lead to costly and lengthy IRS audits. Our tax CPAs have considerable experience in international financial planning and tax law and can help clients solve their real estate investment matters by leveraging every available deduction and tax credit to minimize exposure.
For example, by carefully reviewing your income, assets, citizenship status, and other factors, our tax accountants can confirm your reporting requirements to the IRS. We can estimate your tax liability, make sure to disclose necessary transactions and assets and determine which tax treaties might apply to your situation to lower what you owe. Identifying and utilizing exemptions and credits is crucial for all taxpayers, including foreign nationals who are not citizens of the United States. We can ultimately help clients plan and prepare their taxes by Tax Day so that they do not face any unnecessary penalties for late filing from the IRS.
International Investment in US Real Estate on the Rise
Private citizens and even foreign governments continue to buy real property in the United States. The trend may only increase as the housing market improves and property values begin to rise again.
Some of the most popular cities for foreign investors to buy land in the United States include New York City, San Francisco, Houston, Nashville, Miami, and Washington, DC. Adding U.S. property to your own investment portfolio is a sound financial maneuver, but doing so requires careful tax preparation. If the IRS decides that your interest in domestic real property constitutes being “engaged in a U.S. trade or business,” the entire game changes for your filing requirements and exposure to tax liability. What may have only been a flat tax paid through withholding could become a full-scale investigation demanding much larger payouts to the federal government. Even if you only plan on earning passive rental income, you need to consult with an international tax CPA to ensure you are protected
Contact Our Tax Accounts to Handle Your Transactional Tax Issues
For assistance from our tax CPAs for transactional tax issues at US Tax Help, call us now at (541) 362-9127