Since the world is becoming smaller all the time, my representation to foreign buyers of real property in the USA includes bringing relevant information to your attention before your purchase.
USA Tax Requirements:
- Taxpayer Identification Number: In order to transact real estate business in the US, a taxpayer identification number (TIN) is required. Those who are not eligible to receive a Social Security number can apply for a TIN online (www.irs.gov) by completing IRS Form W-7 “Application for IRS Individual Taxpayer Identification Number.” Please note that processing time will take between 8 to 10 weeks, so be sure to apply well in advance of a planned transaction.
- Capital Gains: Nonresident aliens and foreign corporations are taxed on income resulting from the sale of US real estate regardless of the length of time a person has been in the United States. Investors should monitor tax treaties because they change frequently. A buyer who is aware of that at the time of purchase can plan accordingly. Please consult with an attorney or accountant.
- FIRPTA (Foreign Investment In Real Property Tax Act): Under FIRPTA, the IRS taxes capital gains of a nonresident alien or foreign corporation disposing of US real property interests as effectively connected with a USA trade or business, even if the property is a wholly passive investment and has generated no income during the holding period. The buyer or withholding agent must withhold 10% of the purchase price and remit it to the IRS within 20 days of the transaction. The transaction closing procedures may include completion of FIRPTA withholding and reporting requirements. This to ensure tax collection from foreign taxpayers, The seller may apply to the Internal Revenue Service (IRS) to reduce the 10%
to the amount of tax estimated to be due. - Income Tax (on income producing property): Generally, nonresident aliens are taxed at a flat 30% federal tax rate on gross rental income, unless they make a certain income election on their returns. This election, which allows for deduction for regular expenses before income tax is calculated is commonly know as the “net election.” Please consult with a tax advisor.
- Property Taxes: Property tax payments are required as an additional cost of real property ownership. These payments can be added to a loan or paid directly to the taxing agency. Failure to pay property taxes can lead to financial penalties and even loss of the property. It’s important to know that change in ownership, such as altering title among family members and differing entities, may cause the property value to be reassessed, and the property tax payments to increase.
- Title Decisions: The way a foreign buyer takes title (as an individual, foreign corporation, USA corporation or trust is a serious decision that could affect their ability to transfer the property as well as the financial and tax implications both during property ownership and upon sale. Since the method of holding title can affect tax consequences during life and after death, it’s advisable to seek a competent lawyer or an accountant with an international practice.
- Contract and Conducting Negotiations: In the United States, a contract to sell real estate must be in writing and signed by the parties involved in order to be enforceable. Verbal agreements to sell are not binding.
Disclaimer: Since the world is becoming smaller all the time, my representation to foreign buyers of real property in the USA includes bringing relevant information to your attention before your purchase. However, I am not a lawyer or an accountant. Any information given in this section is for informational purpose only. Always seek the advice of a professional.
