An Overview of U.S. Real Estate Taxation for Foreign Investors

An Overview of U.S. Real Estate Taxation for Foreign Investors

Introduction to U.S. Real Estate Taxation for Foreign Investors

When it comes to making investments, one of the most common types of investments is in real estate. Unlike many other countries across the globe, the United States does not have nearly as many hurdles for foreign individuals or foreign entities that would like to invest in U.S. real estate. In other words, while some countries prevent anyone other than their local permanent residents and citizens from acquiring real estate – foreigners, non-resident aliens, and even foreign entities can acquire US real estate. Let’s take a brief introductory look at five important facts for foreigners owning US real estate.

Purchasing U.S. Real Estate is the ‘Easy Part’

When it comes to investing in US real estate as a foreign investor, acquiring the real estate is typically the easy part. There can be some hurdles depending on whether the taxpayer requires a mortgage because the taxpayer may not have any credit sufficient to qualify for a mortgage. But as long as the foreigner has the funds available to acquire the property, then buying the property and getting it transferred into their name is typically not a challenge.

Rentals and 30% withholding

Especially in a hot rental market, foreign investors may want to acquire one or several properties and begin writing those properties out immediately. One important fact to consider is that when the owner of the home is a non-US person for tax purposes (NRA), the income being generated is generated by the non-resident alien and would be considered FDAP. This type of income is taxed at 30% and withholding is required. If the 30% is not properly withheld and forwarded to the Internal Revenue Service, almost all parties involved in the transaction may be subject to having to pay that tax. Taxpayers may qualify to make an ECI election to avoid this harsh treatment.

Sales and FIRPTA Withholding

FIRPTA Is the Foreign Investment in Real Property Tax Act — and for foreign investors it is a pain to deal with. The idea behind FIRPTA is that in general NRAs are not taxed on capital gains generated in the United States (subject to various exceptions, exclusions, and limitations) the same rule does not apply to real estate located in the United States, which is considered taxable when it is sold. To ensure that foreign investors properly pay their taxes on the sale of real estate, there is a 15% withholding requirement of the gross sale price and not the projected gross income. Thus, depending on the value of the property, it may lead to a significant withholding requirement for foreign investors of US property. In order to avoid FIRPTA, some taxpayers will seek to acquire property as a U.S. entity — but this comes with its own set of potential headaches and other issues involving U.S. Tax Laws.

U.S. Situs and Non-Resident Gifts

It is important to note, that US real estate is considered U.S. situs even if it is being owned by a foreign person. When a foreign person transfers US property as a gift, there may be an immediate gift tax implication that can reach upwards of 40% tax on the gift. Even though the property is located in the United States, since the owner of the property is a nonresident alien and presumably not domiciled in the United States, they typically will not benefit from the increased gift and estate tax exemptions.

Estate Tax Exemption/Exclusion Limitations

Before acquiring the property, foreign investors may want to consider if there is a way for the property to be acquired by a U.S. person. A common scenario we see here is when the NRA foreign investor may be purchasing the property for a child who is attending university in the United States. Instead of purchasing the property as a foreign investor, if the foreign investor gifts money to the US person or child who then acquires property under their name, it may limit some of these issues discussed in the article — although it could come with other issues to contend with.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.