Disclaimer: After this question was asked to me many times I decide to publish the most frequent questions for the benefit of all interested foreign buyers. This is a simple guide for foreigners buying a property in United States, I am not a CPA or an Attorney, this information in only for the interested foreign buyers for education purposes only. This information maybe is not 100% reliable. If you have further questions please contact a CPA or a Real Estate Attorney in the State where the property is located.
- Can a foreigner buy a property in the US?
Yes, a foreigner can buy property in the US. The property can be bought in the name of the individual or it can be bought in the name of a trust, domestic LLC or a foreign corporation. All three vehicles can provide liability protection and tax planning advantages to a foreign buyer.
- When buying a property in US, what taxes does a foreigner need to pay?
A nonresident alien does not need to pay a specific tax due to their residence status. A nonresident will have to check with a Real Estate Attorney or CPA before buy a real estate property in the State where the property is located.
- When selling a property in US, what taxes does a foreigner need to pay?
A foreign person needs to pay gains tax and FIRTPA withholding tax. Federal Gains tax is currently 15% of the net capital gain. Net capital gain is the amount of the gain on the property with the original purchase price, closing costs, and capital improvements (renovations), subtracted out. Please check with a CPA or Real Estate Attorney regarding the tax percentage that applies where the property is located.
A foreign seller is also charged a Foreign Investment in Real Property Tax (FIRPTA).
What is FIRPTA?
FIRPTA is a withholding tax required of a foreign seller. The FIRPTA withholding tax amounts to roughly 10% of the gross sales price. If the seller is current on all of their other taxes owed to the IRS (i.e. income taxes, capital gains tax, etc.) then they should receive a refund of the 10% that was withheld at the sale.
Trusts with foreign beneficiaries and foreign corporations that sell a US property must withhold 35% of the amount realized on the sale.
- What is the Death Tax and do foreigners have to pay this?
Foreign persons are also subject to Federal estate tax on property owned in the U.S. when they die. Currently the estate tax rate can be as high as 35%. U.S. citizens are given an individual exemption from the tax up to 5 million dollars. Married couples are currently exempt up to 10 million dollars. Important!! Please check with a CPA or Real Estate Attorney in the State where the property is located. However, non U.S. citizens are not granted the exemption, unless a treaty exists with their country. As a result, please check with a CPA or Real Estate Attorney in the State where the property is located to know if the property is subject to estate tax.
- What are the advantages and disadvantages of buying in the name of an individual?
Currently, long term capital gains tax rates are 15% for individuals and there is no capital gains treatment for C corporations. Federal corporate tax rates can be as high as 35%. What this means for the foreign buyer is a tax savings on the capital gains on the sale of the property if it is held individually as opposed to a standard corporation. However, these taxes can be avoided, and the foreign person can obtain the Federal capital gains tax rate of 15%, by creating an LLC. LLC’s allow individuals to be taxed at their own individual tax rate, instead of being subject to the high corporate tax rates of 35%. As a result, there is not a significant advantage in tax treatment to a foreign buyer if they own a property individually.
While there is not a significant difference in tax treatment between owning the property individually or through an LLC, there is a difference in liability protection. Owning a property individually can subject the foreign buyer to lawsuits in the U.S., whereas, an LLC can protect the foreign buyer’s assets outside those owned by the LLC from liability. An LLC can also provide the foreign buyer with additional privacy protections, as purchasers of property in any of the US States are required to register their ownership with the city and state and these registries are accessible to the public in online databases.
If a foreign person wishes to purchase the property individually, they can create an irrevocable trust to hold the property. An irrevocable trust will avoid estate tax when the foreign person dies. In addition, a trust can provide similar privacy protections to a corporation.
Please before buy any property in US consult with your CPA or Real Estate Attorney to discuss any question regarding the holding a title in a property.
- What are the advantages and disadvantages of buying in the name of a US corporation or LLC?
As noted above, owning a property through an LLC or US corporation can provide liability protection and additional privacy to the foreign buyer. Unlike a corporation, an LLC provides the foreign person the ability to be taxed at their individual rate, as opposed to corporate tax rates. However, owning the property through an LLC alone, will not avoid estate tax.
In order for a foreign person to avoid estate tax, they can create a LLC (i.e. in the State where the property is bought) in addition to a foreign holding corporation such as a BVI, which is a corporation formed in the British Virgin Islands. Provided the BVI is the member of the State where the LLC is formed, the foreign person can avoid estate tax on US owned property. Under this structure, the IRS views the ownership of the property as an intangible asset, which is not subject to estate tax.
Please before buy any property in US consult with your CPA or Real Estate Attorney to discuss any question regarding a LLC and its benefits.
- What is a Tax Treaty and how will that affect my tax liability?
The US has tax treaties with many foreign countries. Under these treaties, foreign residents are taxed at reduced rates, or are exempt from U.S. taxes on certain items of income. These reduced rates and exemptions vary from country to country. Many of these treaties also cover Federal estate tax and provide certain residents of foreign countries a pro-rated amount of the Federal Estate tax exemption of 5 million dollars for individuals.
If there is not a treaty between the buyer’s country and the U.S., or if the treaty does not cover Federal estate tax, then a foreign person is subject to Federal estate tax on the value of the property over $60,000 when they die. The IRS currently has copies of the tax treaties between the U.S. and foreign countries available on its website:
- Am I treated differently for tax purposes if I buy a property?
A foreign person is not treated differently when they buy the property for tax purposes. However, as noted above, buying a property in the name of a trust or a foreign holding corporation such as a BVI can avoid estate tax in the US and provide additional liability and privacy protections. However, purchasing a property through a trust or an offshore company will not avoid Federal capital gains tax or FIRPTA withholding tax on the sale.
- How do I obtain a TIN?
A taxpayer identification number (TIN) is required by the IRS to file all tax returns in the U.S. There are four different types:
Social Security Number
To obtain a social security number you must submit evidence of your identity, age, and U.S. citizenship or lawful alien status in addition to completing a form SS-5 with the social security administration. The social security administration’s website is listed below:
Employer Identification Number
An employer identification number is used by business entities as well as trust and estates. You can apply for an EIN online through the IRS website:
Individual Taxpayer Identification Number
An Individual Taxpayer Identification Number (ITIN), is a tax number for certain nonresident and resident aliens, who cannot get a Social Security Number (SSN). It can be obtained by filing a W-7 application with the IRS.
Preparer Taxpayer Identification Number
A paid tax preparer must apply for a Preparer Tax Identification Number (PTIN) on the IRS’ website.
“Oh, by the way… I’m never too busy for any of your referrals.”
Stella Bonin, CPRES, BBS, CSP, SFR
CPRES: Certified Probate Real Estate Specialist
BBS: Business Broker Specialist
CSP: Certified Short Sale Professional
SFR: Short Sales & Foreclosure Resource
Burke Real Estate Consultants
12526 High Bluff Dr, Ste 300
San Diego, CA92130
CA DRE # 01222569
Century 21 Arizona Foothills
33765 N Scottsdale Rd #130
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