Across the United States, brokers report higher numbers of property sales to non-US buyers. The strength of various foreign currencies relative to the USD has attracted the attention of investors who find their purchasing power greatly increased. Even so, a foreign investor must understand the tax implications that come with an investment in land, residential, and commercial properties. Certified public accountant Ann Irons, who works closely with foreign investors, real estate lawyers, and resident aliens, discusses questions to ask when considering foreign investment in US properties.

Will the property be subject to estate tax?

Estate tax laws within the United States are complex and far-reaching for US citizens and foreign investors alike. While it is possible to structure a purchase in a way that allows a decedent to own stock, not the property itself, at the time of death, doing so almost certainly requires the expertise of someone who has extensive experience and knowledge of tax laws for foreign investors. When determining the optimal investment structure, Irons will consider several factors, including:

• Whether the investor retains interest in a transferred property
• Whether a treaty provision applies
• The consequences of each structure
• The value of the property in question

Will the property be transferred as a gift?

Unlike an investor who is a US citizen, a foreign investor who purchases and transfers US property as a gift is subject to gift taxes. Irons cautions that this applies even if gift tax treaties or estate taxes are in place. As an investor who is neither a resident nor US citizen, you are not eligible for the gift tax credit. The appropriate tax amount will be calculated based on the fair market value when the gift is given. The amount of the estate tax will be calculated similarly.

Will the property generate income from rent?

As a non-resident alien, you are required to report net income generated by a trade or business within the United States. For example, a property that generates rental income will most likely be categorized as a business. A 30 percent withholding rate applies to rent income deemed either determinable or fixed, while rent income effectively connected with a US business or trade generally results in a lower tax rate.

Will I reside in the property? If so, for how long?

If purchasing a home, rental property, or vacation home in the United States for personal use, you will inevitably spend a good deal of time in the US. The number of days spent within the US will determine whether you qualify as a resident for reasons of income taxation. Your status will be determined by counting how many days you are physically present within the US, either for business matters or as a resident.

A Note on the Foreign Investment in Real Property Tax Act of 1980

In most cases, a non-resident alien need not pay income tax on his or her capital gains. However, this does not apply to capital gains generated by the exchange or outright sale of US property. As a foreign corporation or non-resident alien, your gains and losses are treated as if they were those of either a trade or business based in the United States. As such, these amounts are subject to net income taxation.

Questions about reporting investments in US property? To learn more about tax laws for foreign investors, or to request a meeting with Ann Irons, CPA, LLC, contact us at 508-966-0700. Our services include tax preparation, accounting, bookkeeping, and financial services for businesses and individuals in and around Bellingham, Woonsocket, Medway, Milford, Boston, and the surrounding areas.