The current economic climate in the U.S. has provided investors with great opportunities with respect to investments in U.S. real estate. If you are a non-resident of the U.S., (i.e., any individual without U.S. citizenship) and you are contemplating an investment in U.S. real estate or have already made such investments, it is critical that you understand the tax implication in order to be able to fully assess the return on your investment and to ensure you are in full compliance with U.S. law.
Whether you’re investing in a residential building or single-family home in the U.S., the majority of investors typically will hold title to their investment through a U.S. limited liability company (LLC) due to the legal and tax benefits afforded by using such an entity.
As a non-resident alien, you are generally not required to file a tax return in the U.S. unless you are employed in the U.S. or have “U.S. source income.” As the term implies, U.S. source income refers to income you earn from activities based in the U.S. , including rental income from real estate located in the U.S. As such, once you acquire real estate (even a minority interest in the real estate) located in the U.S., you will be required to annually file a tax return in the U.S. (Form 1040NR). On this return, you will be required to report and pay tax on the rental income you earn from the property. However, you will not be required to report your other income unrelated to the rental property and which you earn outside the U.S. In addition, you do not need to report the value of the property nor the value of any other assets in your possession.
In order to file your first U.S. tax return, you will need to obtain an Individual Taxpayer Identification Number (ITIN). Without this number, the Internal Revenue Service (IRS) will not accept your filing and you will be considered in default until you resubmit your return with an ITIN. To obtain an ITIN, you will need to complete Form W-7 and certify your identify by either mailing the IRS original documentation (e.g., passport) or by undergoing a brief interview with an IRS Certified Acceptance Agent who can confirm your identify based on the documents you provide and then sign your application. The process can be complicated and can take up to 8 weeks to complete.
When owning real estate in the U.S. it is also important to remember that you will most likely be required to also file a state income tax return in the state in which your LLC is formed and/or where the property is located. This does not necessarily mean that you will be required to pay tax in such state (since some states are very generous with their rules) but, nevertheless, you should be mindful of this potential additional filing obligation.
Furthermore, owning U.S. real estate will also subject you to the U.S. estate tax. Under the U.S. tax code, the value of U.S. real estate owned by a non-resident will be included in their gross estate and subject to a 40% estate tax at the time of death. The tax will be calculated based on the fair market value of the property at the time of death. Unfortunately, unlike U.S. citizens, the estate of non-residents is entitled only to a limited exclusion of $60,000.
At Expat Tax Professionals, we have the experience and knowledge to address the needs of non-residents investing in U.S. real estate.
Our services include:
- LLC Formation –including filing the articles, obtaining a Federal EIN and providing an operating agreement.
- U.S. Bank Account – Opening a U.S. bank account for LLCs and non-resident individuals without the need to travel to the U.S.
- U.S. Tax Returns – we can prepare your LLC return as well as your individual income tax returns.
- Consulting – consult with one of our specialists regarding the tax implications of your investment in U.S. real estate.