Understanding tax rules when purchasing property in the US will help you make the most of your investment
Non-US citizens can buy property since there is no citizenship requirement for real estate sales. In fact, foreigners can even qualify for a mortgage if they meet certain requirements. However, nonresident owners of US property should be aware of a their local, state & federal tax and compliance requirements…
Generally, income from US rental property owned by a nonresident is taxed at 30% (or lower treaty) rate if it is not effectively connected with a US trade or business. Booking agents and management companies are required to withhold 30% of rental income but an exemption can be made by completing and filing Form W-8ECI with the withholding agent
Election to Treat Income as Effectively Connected with a Trade or Business in the US
By electing to treat income as effectively connected income, expenses in relation to the property are deducted to minimize net income for tax purposes
Tax Reporting Obligations
All property owners residing offshore who receive income from their rental homes, where IRS withholding has not been applied, must file a US Income Tax Return. The US tax year runs January to December and returns are due by June 15th annually. Where an election to treat income as effectively connected has been filed, expenses may be offset against rental income and any relevant losses carried forward until the eventual sale of the property when certain losses may be used to minimize capital gain. Please visit our website for information on personal use of your US property, allocation of expenses, “passive activity loss” and “vacation home loss”.
Tax treaties might provide a reduced tax rate
State withholding or tax liability may apply
FIRPTA Withholding and Capital Gain
The disposition of a US real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. A withholding of 15% on the gross sales proceeds of the transaction is applied —unless the nonresident has a specific exemption from the withholding. A petition for exemption must be filed with the IRS in advance of the sale date to obtain a certificate of exemption (Form 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests). A lower rate of 10% applies to dispositions under $1 million for US property acquired as personal property.
When a nonresident sells a property in the US, any gain is taxed as if the property had been sold by a US citizen or resident. This means the gain may qualify for lower long term capital gains treatment, provided the property has been held for more than 12 months.