Aliens are subject to U.S. income taxation on a limited basis. Unlike U.S. persons who are subject to U.S. taxation on their worldwide income, foreign investors generally are subject to U.S. taxation on two categories of income: 1) certain types of U.S. source income (e.g., interest, dividends, rents, annuities, and other types of “fixed or determinable annual or periodical income,” collectively known as FDAP income); and 2) income that is effectively connected with a U.S. trade or business (“ECI”). U.S. source FDAP is subject to a 30 percent withholding tax imposed on a gross basis (this rate may be reduced by treaties) and ECI is subject to tax on a net basis at the graduated tax rates generally applicable to U.S. taxpayers.
Many aliens have invested in the U.S. real estate market. There are special U.S. tax consequences that must be carefully considered. Investing in the U.S. real estate market often requires a balancing of U.S. federal income tax considerations on one hand, and U.S. federal gift and estate tax on the other. While U.S. federal income tax rates on the taxable income of an individual foreign investor are the same as those applicable to a U.S. citizen or resident, the federal estate and gift tax as applied to foreign investors can result in a dramatically higher burden on a taxable U.S. estate or gift transfer than for a U.S. citizen or resident.
The gross estate (all the U.S. property which the decedent had an interest in at the time of death) of a non-resident foreign investor is taxed from 18 percent to 40 percent of the value of the estate in excess of a $60,000 exemption. As a result, for many foreign investors, the most important U.S. federal tax consideration is U.S. federal estate and gift taxation. At Diosdi Ching & Liu, LLP, we carefully analyze each client’s situation to determine the best plan to mitigate the investor’s situation to determine the best plan to mitigate the individual’s exposure to U.S. taxes. We begin with how the foreign investor intends to hold the U.S. real property.
Choices
The foreign investor has a number of choices regarding the entity with which to invest in the U.S. They include:
1. Direct investment in the investor’s name.
2. The investor may incorporate a domestic corporation and invest through it.
3. The investor may incorporate in a foreign jurisdiction and cause the foreign corporation to make the investment.
4. The investor may form a partnership or limited liability company which in turn makes the investment.
5. The investor may make investment through a trust, either foreign or domestic.
Direct Investment
A non-resident alien is perfectly free to own U.S. real estate. From a tax standpoint, there are no income tax prohibitions to ownership of U.S. real estate by a foreign individual. Most sophisticated foreign investors, however, have not held property in their own names because that approach does not allow anonymity and, more importantly, subjects the foreigner’s estate to U.S. estate tax and probate upon the owner’s death. Individual ownership also does not allow much in the way of effective tax planning.
Corporate Investment
Corporate ownership of real estate by a foreign investor continues to be the most preferred (but not necessarily the best) method of holding title to real estate. Once the determination has been made to invest through a corporation, the question arises as to whether the corporation should be domestic or foreign. If the corporation is foreign, the investor can potentially avoid U.S. estate tax, but the corporation may be subject to U.S. branch profits taxes, which may be steep.
Limited Liability Company Investment
All states and a number of foreign jurisdictions have adopted legislation authorizing limited liability companies. Limited liability companies present a combination of both corporate and partnership law. While a limited liability company may have appealing business characteristics, for tax purposes, limited liability companies are typically treated as disregarded entities. This means that for tax purposes, real estate held by a foreign investor through a limited liability company will be treated as if it were directly held by the investor. Even though holding real estate through a single limited liability company is not advisable for tax purposes, utilizing multi-tier limited liability structures can be very attractive as an investment vehicle.
Investing Through a Trust
A foreign grantor trust is usually not a good choice to own U.S. real estate because it exposes the real estate asset to the estate tax in the event of the foreign investor’s death. A grantor trust exists when a foreign investor either has the sole right to revoke a trust which holds real estate, or the income from the trust is distributable only to the foreign investor or the foreign investor’s spouse. When the trust that holds the real estate is a foreign grantor trust, it is deemed part of the foreign investor’s estate. On the other hand, a foreign trust that is not taxed as a grantor trust is taxed as an irrevocable trust. A foreign investor may find the use of an irrevocable trust valuable for estate tax purposes since one of the main drawbacks for an individual investing in U.S. real estate is the estate tax risk.
At Diosdi Ching & Liu, LLP, we carefully consider the best vehicle to real property to mitigate U.S. income tax and estate and gift tax. We not only advise foreign investors of their options to holding title to real property, we also assist foreign investors in establishing these vehicles.
U.S. Tax Planning to Minimize Income Tax Gains for Foreigner’s Investing in U.S. Real Property
Foreign investors considering investing in the U.S. real estate market should understand that appreciation of the property is subject to U.S. capital gains taxes. At Diosdi Ching & Liu, LLP, we advise foreign investors of their options to mitigate U.S. capital gains on U.S. real property. Foreign investors may reduce their exposure to U.S. capital gains through the contingent interest rules. Foreign persons typically are not subject to U.S. source capital gains unless those gains are effectively connected to a U.S. trade or business. Internal Revenue Code Section 897, however, treats any gains recognized by a foreign person on the disposition of U.S. real property interest (“USRPI”) as if it were effectively connected to a U.S. trade or business. A USRPI is broadly defined as: 1) a direct interest in real property located in the U.S.; and 2) an interest (other than an interest solely as a creditor) in any U.S. corporation holding real property (i.e., a corporation whose USRPIs make up at least 50 percent of the total value of the corporation’s real property interests and business assets).
The Income Tax Regulations under Section 897 elaborate on the phrase “an interest other than an interest solely as a creditor” by stating it includes “any direct or indirect right to share in the appreciation in the value, or in the gross or net proceeds or profits generated by, the real property.” The regulations go on to state that a “loan to an individual or entity under the terms of which a holder of the indebtedness has any direct or indirect right to share in appreciation in value of, or in gross or net proceeds or profits generated by, an interest in real property of the debtor is, in its entirety, an interest in real property other than solely as a credit.”
This principal is illustrated by an example in Income Tax Regulation Section 1.897-1(d)(2)(i): A non-U.S. taxpayer lends money to a U.S. resident to use in purchasing a condominium. The non-resident lender is entitled to receive 13 percent annual interest for the first ten years of the loan and 35 percent of any appreciation in the fair market value of the condominium at the end of the ten-year period. The example concludes that, because the lender has a right to share in the appreciation of the value of the condominium, he has an interest other than solely as a creditor in the condominium (i.e., a USRPI). Accordingly, a debt instrument with contingent interest that is tied to U.S. real estate (otherwise known as a shared appreciation mortgage) is a USRPI for purposes of Internal Revenue Code Section 897.
Income Tax Regulation Section 1.897-1(h) Example 2 illustrates a significant planning opportunity for non-U.S. investors investing in U.S. real estate. In the example, a foreign corporation lends $1 million to a domestic individual, secured by a mortgage on residential real property purchased with the loans proceeds. Under the loan agreement, the foreign corporate lender will receive fixed monthly payments from the domestic borrower, constituting repayment of principal plus interest at a fixed rate, and a percentage of the appreciation in the value of the real property at the time the loan is retired.
The example states that, because of the foreign lender’s right to share in the appreciation in the value of the real property, the debt obligation given the foreign lender is an interest in the real property “other than solely as a creditor.” Nevertheless, the example concludes that Section 897 will not apply to a foreign lender on receipt of either the monthly or the final payments because these payments are considered solely of principal and interest for U.S. income tax purposes.
By characterizing the contingent payment on a debt instrument as interest for U.S. income tax purposes, the Section 897 regulations potentially allow foreign investors to ability to avoid U.S. income tax on gains arising from the sale of U.S. real estate. If you are a citizen of a country other than the United States and are considering investing in U.S. real estate or holding U.S. real estate as an investment, call the international tax attorneys at Diosdi Ching & Liu, LLP to determine if a strategy can be developed on your behalf to reduce your exposure to U.S. capital gains associated with the increase in value of the real property that you are either considering acquiring or that you have already acquired.
U.S. Tax Planning for Direct Non-Real Estate Investment for Foreigners
Foreigners investing in U.S. businesses and other investments, must be mindful of the tax consequences of investing in the U.S. For example, foreigners investing in the United States can be subject to U.S. estate and gift taxes and branch profits taxes. Foreigners investing in the United States typically utilize a U.S. corporation as a base vehicle of choice for investing in the United States. The objective is to maximize the value of the interest deduction, which requires an analysis of the effective tax rates in both U.S. and the effective tax rates in both the U.S. and the country where the investment originates.
At Diosdi Ching & Liu, LLP, we understand the complex rules governing utilizing financing to acquire a U.S. business or start-up a U.S. business. If you are foreign investor looking to acquire a U.S. business or start a U.S. business, contact the international tax attorneys at Diosdi Ching & Liu, LLP.
FAQs
FIRPTA is the Foreign Investment in Real Property Tax Act. It requires a 15% withholding of the sale price (not the perceived gain) to be deposited with the US government pending the completion of the sale — this is to ensure that the foreign national files a U.S. tax return and pays any capital gain income.
What are the tax implications for foreign ownership of US real estate? ›
Thus, if one does choose to own U.S. real estate individually, the foreign individual investor will be subject to an estate tax in the event that the investor passes away while owning the U.S. real estate. The current federal estate tax for foreigners is 40% plus the applicable state tax rate (depending on the state).
Can foreign investors own US real estate? ›
Even though it's perfectly legal for foreigners to invest in U.S. real estate, it may be difficult to obtain a loan for the investment. It's also common for foreign investors to run into difficulties understanding U.S. taxes, which can lead to substantial problems when it comes time to invest in a property.
Do non-US citizens pay capital gains tax on real estate? ›
The tax implications for foreign investors depend on if they're classified as a resident alien or nonresident alien by the U.S. government. Nonresident aliens are subject to no U.S. capital gains tax, but capital gains taxes will likely be paid in their country of origin.
Do foreigners pay estate tax in the US? ›
More In File
Certain deceased nonresidents who were not citizens of the United States are subject to U.S. estate taxation with respect to their U.S.-situated assets. For estate tax purposes, a citizen of a U.S. possession is not a U.S. citizen.
Does foreign real estate need to be reported to IRS? ›
Yes, you must report foreign properties on your U.S. tax return just like you would report any owned U.S. property. To do that, you first need to know what type of ownership you have because it affects what tax forms you must file.
Why are foreign investors allowed to buy property in the US? ›
Lack of Restrictions Imposed by the United States Government
Therefore, international buyers are not subject to any additional taxes or regulations. The rights to purchase and own property in the United States is the same for a foreign investor as they are for a United States citizen.
Can I own a house in USA as foreigner? ›
Yes, it is possible for a non-permanent resident to buy a house in the United States. Mortgage approval odds generally depend on the lender, type of mortgage, income status and whether the non-permanent resident can prove their intent for long-term residency.
Can foreign investors use 1031? ›
A 1031 exchange is available to foreign sellers of real property held for productive use in a trade or business, or held for investment purposes, however, the foreign status of the person or entity selling the real property can cause some extra complications which must be addressed.
Who is the largest foreign owner of US real estate? ›
Despite what you may have heard about China's specific influence in purchasing property and agricultural land in the U.S., Canada is still the largest investor, accounting for 8% of foreign investments in U.S. real estate, according to the National Association of Realtors.
Those include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. It's no coincidence that these eight are also no personal income tax states. (Although, Tennesee has a limited tax on certain dividends and capital gains, and New Hampshire taxes interest and dividends income.)
What is the estate tax exemption for a non US citizen? ›
Tax rates and credits
An exemption of $60,000 is available against the value of assets includable in the US taxable estate of an individual who was not US domiciled. In addition to the Federal estate and gift tax, there may be additional state estate and gift taxes.
What is the US capital gains tax rate for foreigners? ›
Non-resident aliens are taxed at 30%, collected by withholding at the source of the payment, on US-source net capital gains if they are in the United States for 183 days or more during the taxable year in which the gain occurs.
Can a foreigner inherit US property? ›
Can Noncitizens Inherit Property? One threshold question you may have is simply whether you can leave property to someone who isn't a U.S. citizen. The answer is yes; noncitizens can inherit property just as citizens can.
Are green card holders subject to US estate tax? ›
United States Citizens and Permanent Residents (typically a green card holder) are subject to United States estate and gift tax on their worldwide assets, whether through lifetime gift or passing at death.
What countries have estate tax treaties with the US? ›
The United States has estate tax treaties with Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherland, Norway, South Africa, Switzerland, and the United Kingdom.
How does IRS find out about foreign accounts? ›
FATCA Reporting
One of easiest ways for the IRS to discover your foreign bank account is to have the information hand-fed to them from various Foreign Financial Institutions.
How does IRS know about foreign accounts? ›
The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report account numbers, balances, names, addresses, and identification numbers of account holders to the IRS.
Can the IRS seize foreign bank accounts? ›
The IRS can issue a levy notice to any bank that is within the US. Thus, if a taxpayer has an account with a foreign bank, but that bank has a branch in the US, the IRS can simply issue a levy notice to the US office. This means the IRS may possibly reach the overseas bank account.
What percent of US homes are owned by foreigners? ›
Foreign buyers living in the U.S. made up the lion's share of investors, buying $34.1 billion worth of U.S. homes — or 58% of the volume.
Of the 1.3 billion acres of private agricultural land in the United States, foreign entities fully or partially owned roughly 40 million acres valued at $74 billion in 2021.
What happens if more foreigners purchase US investments? ›
When foreign investors buy more U.S. stocks and bonds, the income receipts increase. This increases because money is flowing into the United States and this increases the balance of trade.
How can a foreigner invest in US property? ›
What you need to buy property in the U.S. as a non-citizen
- social security number or ITIN.
- valid foreign passport, a U.S. visa, or a driver's license.
- bank statements and, if applicable, financial records from your overseas bank.
- proof of reserves.
- pay stubs.
- credit score.
- tax return.
Owning property in the US does not grant any right of residency. If you get a US B1/B2 visa in your passport, whatever your nationality, CBP will ordinarily allow a maximum stay of six months, and no working or studying.
Can I buy a house in the US if I have a green card? ›
A lawful permanent resident is someone who holds a “green card.” Green card holders may apply for home loans just like citizens. Lawful permanent residents can use their green card as proof of residence to get financing and buy a home in the U.S.
Who Cannot do a 1031 exchange? ›
The tax code specifically excludes some property even if the property is used in trade or business or for investment. These excluded properties generally involve stocks, bonds, notes, securities and interests in partnerships. Property held “primarily for sale” is also excluded.
Which type of property does not qualify for 1031 exchange? ›
Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.
Does a 1031 exchange avoid Firpta? ›
Avoid FIRPTA Tax With 1031 Exchange
1031 exchange is an exception to the FIRPTA and can be obtained when the foreigner applies for a withholding certificate on IRS form 8288-B before the sale.
Who is the richest real estate broker in USA? ›
At the top, Orange County, California-based Donald Bren remains the wealthiest real estate billionaire in the country with an estimated $16.2 billion net worth, nearly $1 billion higher than last year.
What country has the richest real estate? ›
China is home to more of the world real estate market assets (by value) than any other country at $42.7tn or 21 per cent of global real estate value, just ahead of the US at $42.1tn.
The largest real estate company in the USA is Coldwell Banker. Founded in 1906, Coldwell Banker has over 100 years of experience buying and selling homes that they share with the people they work for. It has a total of 3000 offices and even exists in more than 49 countries.
Where in the US has no property tax? ›
Unfortunately, there are no states without a property tax. Property taxes remain a significant contributor to overall state income. Tax funds are used to operate and maintain essential government services like law enforcement, infrastructure, education, transportation, parks, water and sewer service improvements.
How do I avoid capital gains tax in USA? ›
9 Ways to Avoid Capital Gains Taxes on Stocks
- Invest for the Long Term. ...
- Contribute to Your Retirement Accounts. ...
- Pick Your Cost Basis. ...
- Lower Your Tax Bracket. ...
- Harvest Losses to Offset Gains. ...
- Move to a Tax-Friendly State. ...
- Donate Stock to Charity. ...
- Invest in an Opportunity Zone.
The states with no additional state tax on capital gains are: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. These are the same states that do not tax personal income on wages, although they might tax interest and dividends from investments, depending on the state.
Can a non U.S. citizen own a trust? ›
The trustee—that is, the person or entity in charge of managing the trust assets—must be a U.S. citizen or a U.S. corporation such as a bank or trust company.
Can a non U.S. citizen be an executor of a US estate? ›
Non-citizens who are U.S. residents can be executors too. However, just because you can does not mean you should. If the executor moves out of the country between the time you make your will and your death, it could be a substantial hassle for your relatives to even locate the executor and inform him of his duties.
How much money can a U.S. citizen receive as a gift? ›
(It will remain non-taxable.) The thresholds vary depending on the source of the gift. If you receive a gift from a foreign individual or foreign estate, you must report it if the total value of the gift exceeds $100,000 during a given tax year.
What is the one time capital gains exemption in USA? ›
Key Takeaways. You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
Do I have to pay capital gains tax in two countries? ›
you may also owe Foreign capital gain taxes to the country in which the overseas property lies, but you may be able to avoid paying capital gains taxes to both countries by claiming the foreign tax credit, which is a dollar-for-dollar credit on taxes paid to one of the countries.
What is the foreign income exclusion for capital gains? ›
The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year2021, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $108,700 per qualifying person. For tax year2022, the maximum exclusion is $112,000 per person.
For example, if a non-US person left a US citizen a house in California, that would qualify as a US situs asset. This property would be subject to a tax, usually at 40% of its value. But again, for any assets that don't qualify as US situs, no federal inheritance tax will apply.
How do I transfer property to a family member tax free in the USA? ›
The IRS allows you to give $16,000 (for 2022) annually to anyone you like, tax-free. If you're married, you and your spouse can each give $16,000 (for 2022). However, if the value of the gift exceeds the annual exclusion amount, you, as the donor, must file a gift tax return (Form 709) to report the gift.
Do foreigners pay inheritance tax? ›
Do I need to report foreign inheritance or gifts? If you receive an inheritance from a foreign estate or non-resident alien, or gifts from non-resident aliens exceeding $100,000 (USD), then it must be reported to the IRS. This includes the total of all foreign inheritance or gifts received.
Do non US citizens pay capital gains tax on real estate? ›
The tax implications for foreign investors depend on if they're classified as a resident alien or nonresident alien by the U.S. government. Nonresident aliens are subject to no U.S. capital gains tax, but capital gains taxes will likely be paid in their country of origin.
Do green card holders need to report foreign assets? ›
Foreign assets, property and investments
Different from earned income, foreign wealth must be disclosed on your taxes if you're a green card holder.
Do green card holders need to report foreign income? ›
As a green card holder, you generally are required to file a U.S. income tax return and report worldwide income no matter where you live.
What is the estate exemption for non-US citizens? ›
The indexed exemption amount for 2022 is $12,060,000. In contrast, non-US domiciliaries are subject to US estate and gift taxation with respect to certain types of US assets, also at a maximum tax rate of 40% but with an exemption of $60,000, which is only available for transfers at death.
Does a non-US citizen get an estate tax exemption? ›
Estate Taxes for Non-US Domiciliaries
With one limited exception, when a non-US domiciliary dies, all of their US-situs assets will be subject to estate taxes. (This is similar to when a US domiciliary dies, but there, all of their worldwide assets are subject to estate taxes).
What states do not follow federal tax treaty? ›
Federal Income Often Used By States
Some of the states that do not allow treaty benefits are: Alabama, Arkansas, California, Connecticut, Hawaii, Kansas, Kentucky, Maryland, Mississippi, Montana, New Jersey, North Dakota, and Pennsylvania.
What percentage of US homes are owned by foreign investors? ›
Foreign buyers living in the U.S. made up the lion's share of investors, buying $34.1 billion worth of U.S. homes — or 58% of the volume.
Highlights: Foreign Investment US Real Estate Statistics
From April 2020 to March 2021, investors from outside the United States bought 107,000 properties worth $54.4 billion in the United States. Foreign-born individuals make up 14.25 percent of the population in the country's 50 largest metros, on average.
Can a foreign investor get mortgage in the US? ›
Can foreigners get a mortgage loan in the US? Yes, foreigners can get a mortgage loan In US. Both permanent and non-permanent alien residents can get mortgages pretty much like everyone else. Even with just a three percent down payment, they can obtain house loans through the FHA, Fannie Mae, and Freddie Mac.
Who can invest in US real estate? ›
Real estate investment in the US has always been popular among Indians. While any non-US citizen can buy a property in the States regardless of their citizenship, it is crucial to understand the legal and tax norms before taking the plunge. 99acres shares the rules and regulations to invest in US real estate.
How much of US real estate is owned by China? ›
China owns roughly 384,000 acres of U.S. agricultural land, according to a 2021 report from the Department of Agriculture.
Why are Chinese investors buying US real estate? ›
Many Chinese and Hong Kong nationals may find this an intriguing option because of the relatively cheaper housing prices in the United States (compared to metro areas of other western countries) and the availability of coastal area properties in many country locations.
Do foreigners own most of the assets in the United States? ›
If the Federal Reserve's holdings are excluded, foreigners own nearly 60 percent of outstanding marketable treasuries. Foreigners own less-significant portions of other asset markets. Their holdings of equities, though large in dollar terms, are small relative to the size of the equity market.
What country owns the most United States property? ›
In a study of USDA reports, Pew found the foreign country that owns the most U.S. land is not China or Russia, but rather, our neighbors north: Canada. Investors from the Great White North, according to the USDA, own about 12.8 million acres of U.S. land, most of it forest land.
Do foreigners need to be accredited investors? ›
No, you do not have to be accredited, but we do require all foreign investors to use a US bank account and complete either a W-8BEN or W-8BEN-E form. The minimum investment criteria differs for foreign investors, as well.
Can foreigners invest in the US? ›
How To Invest In US Stocks As A Foreigner. Investors from around the world can buy and sell US stocks through brokerages that cater to foreign investors. Not every international brokerage is available in every country, so you will need to find one that specifically provides services in your country of origin.
Can I get green card if I buy property in USA? ›
Yes, you can obtain a green card through real estate investment in the United States. Although buying a real estate property will not directly help get a green card in the U.S., there are some ways to get a green card by investing in real estate. One of the preferable ways is through the EB-5 Investor Program.
Invest $ 1,050,000 To Get An EB-5 U.S. Green Card
It is important that the money used for this investment be traceable - the source and path of funds need to be documented and clean. Processing times vary depending on the birthplace of the investor.
Can you buy US green card? ›
Buying a Green Card with EB-5 Visa
In return for investing $ 900,000 or $ 1,800,000 (depending on the US company's location) and creating jobs for US citizens, the applicant receives the "Green Card for Immigrant Investors."
