Tax & Reporting for Foreign Investors in U.S. Real Estate: Complete Guide

Estate taxes, gift taxes, and income taxes are covered in part one of our Tax and Reporting Guide for Foreign Investors in U.S. Real Estate. 

Nothing is more imperative, as a foreign national, than to understand the framework of taxation and legal issues surrounding their decision to purchase investment real estate in the U.S.

Foreign Investors in U.S. Real Estate are Subject to U.S. Tax Laws and Reporting Requirements

Although there are many tax and disclosure considerations when investing in U.S. real estate as a foreigner, a few important categories are highlighted below:

• Estate Taxes / Gift Taxes
• Income Taxes
• FIRPTA Withholding
• FinCen Reporting

Estate Taxes / Gift Taxes

Any property owned by a foreign person in the U.S. is subject to Estate Taxes upon death.  A foreigners’ shares of a U.S. corporation and membership interests in a U.S. LLC are subject to Estate Taxes.

Amount of estate taxes

Estate Taxes are exorbitant for a foreign person.  A foreign person is taxed at a rate between 26% and 40% of the value of all U.S. assets in excess of $60,000 exemption.  The 40% rate applies to all amounts over $1,000,000.

Avoiding estate taxes

Foreign corporations, U.S. corporations with a foreign corporation parent; foreign irrevocable trusts, and LLC with foreign irrevocable trust parent are a few structures that may not be subject to estate taxes.

Gift Taxes

Gift taxes may apply to tangible assets owned directly such as real estate.  Indirect ownership in stock or entities may also be subject to gift taxes. Gift Taxes may be applicable depending on whether the transfer involves tangible assets like Real Estate.  Consultation with an experienced tax advisor will assist you in determining whether your transfer is subject to gift taxes.

Income Taxes

Rents

Rent received on U.S. real estate is subject to income tax.  It may be considered FDAP income and be subject to a 30% tax on the gross income, without any deductions.  The tenant is obligated to withhold any required tax and send it directly to the IRS.  Always consult a tax advisor as that income may be considered “trade or business” which would change the characterization and requirements applicable to this income.

Gains

Gains on the sale of U.S. real estate is subject to income tax. 

Tax Returns

If you have received rents, sold property or had any effectively connected income in the U.S., you must file a tax return.  Please consult a tax advisor to determine whether filing a return is required. 

Leasing

Any use of real estate by a person or entity which is not the actual title holder will require a lease agreement.  Without limitation, this applies to residential properties owned by an entity, whether or not the use is made by the owners or officers of that entity.

Disregarded LLCS

Although disregarded LLC’s may not have income and expenses, if they are foreign owned, as of 2017 they are required to file informational returns.  Failure to comply will result in significant penalties.  Please consult with a tax advisor to determine what filings are required for you and your entities.

Part II of our tax and reporting guide covers FIRPTA Withholding and FinCen Reporting.

NOTE: THIS BLOG IS NOT INTENDED TO GIVE ANY TAX ADVICE, BUT RATHER TO HIGHLIGHT THE MAJOR AND EXPENSIVE PITFALLS OF FAILURE TO TAX PLAN AS A FOREIGN INVESTOR IN REAL ESTATE.  ANY FOREIGN INVESTOR IN REAL ESTATE SHOULD CONSULT WITH AN EXPERIENCED TAX ACCOUNTANT AND/OR TAX ATTORNEY TO PROPERLY STRUCTURE THEIR TRANSACTION TO PROPERLY COMPLY WITH U.S. TAX LAW AND MINIMIZE TAX LIABILITIES.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

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