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Tax Aspects of Foreign Investment in U.S. Real Estate (based on an article of Kevin J. Mullin in Global Perspectives in Real Estate - January 2008) There are two basic rules that you should know when working with a foreign investor-defined as an individual who is neither a citizen nor a resident of the U.S. Income Tax Rental Income : Foreign owners of rental property in the U.S. must "elect" to pay U.S. income taxes on any net income derived from rental property. This is done by simply filing a U.S. tax return with the election in a timely fashiom. If this election is not made in a timely fashion, the tax could be assessed at the rate of 30% of the gross rent - no deduction for depreciation, interest, property taxes, etc... Sale of Property :Buyers of property from foreign sellers are required to withhold 10% of the purchase price and pay it directly to the IRS at closing. This is known as the "FIRPTA" tax. It is an advance payment on the actual tax liability of the seller. The actual liability is determined when foreign sellers file a U.S. tax return, thereby receiving a refund of a portion or all of the 10 % withheld or paying any excess owed. In these instances, if the tax due is less than 10% of the purchase price, the foreign seller can apply to the IRS for a withholding certificate in advance of closing, permitting the buyer to withhold less than the 10% as provided in the certificate. Gift and Estate Tax Gift Tax : Avoid gifts of real estate. A foreign owner of U.S. real estate who puts his child or a third party on a deed - such as a joint tenant - creates a taxable gift of the interest conveyed to the child or other part. Estate Tax : The U.S. estate tax is assessed on the entire fair market value of the property left by a deceased foreign owner. The estate tax has very limited exemptions, deductions, and credits and is generally more onerous than the U.S. income tax. The estate tax on a $1 million condo, for example, could be as much as #330,000. WIth the proper advance planning, however, foreign investors can completely avoid the gift and estate tax. Disclaimer : The materials contained herein do not contain all of the rules and exceptions affecting the issues presented. As such, they are intended for informational and discussion purposes only. These materials are presented with the understanding and agreement that the author is not rendering any legal or other professional advice and no action should be taken or withheld based on them. Legal advice can only be rendered subect to a formal engagement for each client. HOME/ Contact Claudine
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