Tax Challenges of Cross-Border Real Estate Ownership in US

Tax Challenges of Cross-Border Real Estate Ownership

Tax Challenges of Cross-Border Real Estate Ownership in US: When non-US Persons want to invest into the United States’ marketplace, oftentimes real estate is the easiest path forward. For the most part, real estate values tend to increase over time — and real estate can be used for various different investment purposes — such as rental income; rehabs and flips; deductions against other income (depending on whether the Taxpayer qualifies for actively participating in the passive activity or the real estate professional exception), etc. Still, when a non-US Person wants to invest in US real estate there are some IRS real estate ownership challenges that the individual needs to be aware of. As with anything tax related — it is typically better to manage those expectations before the tax implications creep in.

FIRPTA & Cross-Border Real Estate Ownership

FIRPTA refers to the Foreign Investment in Real Property Tax Act. The most important takeaway for nonresidents owning or investing in US real property is that while some US Capital Gains will escape US tax — real estate is not excluded from capital gains income. Therefore, when a nonresident sells their US real property they may be subject to FIRPTA — which may result in a 15% withholding of the sale price (not the gain) at the time they sell the property — unless they obtain or withholding exemption certificate (IRS Form 8288-B).

Renter’s Insurance to Minimize Risk

If the nonresident seeks to use the real estate property as a rental property, it is important that they obtain US-based insurance. In order to obtain insurance, some insurance companies may require that the Nonresident Alien create a US based LLC or other entity to hold the property — which may result in certain unforeseen tax implications which the nonresident will want to look into before forming the LLC or other entity.

Tax Challenges of Cross-Border Rental Income

Rental income is taxable and for a nonresident alien it is considered FDAP — and the renter is supposed to withhold 30% of each payment and submitted to the IRS. Of course, one of the main benefits of owning rental income is that the taxpayer is able to take several deductions such as mortgage interest and depreciation. The nonresident can still take these deductions as long as they make an election for their rental property income to be treated as ECI and not FDAP.

Transfer Tax Challenges of Cross-Border Real Estate

When a nonresident alien transfers US real estate, there is an immediate potential gift tax implication. Typically, the Transferor can still deduct the annual exclusion — but then there is a gift tax on the transfer.

Substantial Presence Test for Nonesident Non-Citizen/Non-Permanent Resident

If the nonresident real estate investor is a nonresident alien and resides in the United states on a visa or otherwise, for a sufficient time to meet the substantial presence test, then they may become subject to U.S. tax on their worldwide income — and an avalanche of different reporting requirements such as FBAR and FATCA. It is important that the nonresident nonresident assess the pros and cons of becoming a US Person for tax purposes before they end up inadvertently increasing their tax liability if they are unintentionally deemed a US Resident for tax purposes.

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

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