Top 5 US Tax Questions to Ask When Buying US Real Estate

According to the most recent report from the National Association of Realtors[1], sales of US residential real estate to international buyers was $92.2 billion for the twelve month period ended March 2014.  This is a a 35% increase over the March 2013 profile that reported $68.2 billion.  This is proof that despite the recent slow-moving US economy, international investors continue to be drawn to the US real estate market.  As this trend continues, it becomes increasingly more important to educate these investors about the US tax consequences of their ownership in United State real estate. This article is directed at non-US citizens who live abroad and want to purchase US real estate.

1. What will you do with the property?

The ultimate purpose of the property will have a big impact on the US tax treatment. Will it be a second residence, a fixer upper, a rental property or a mixture?  If the property will be a rental, a US tax return will likely be required to report the earnings and deductions from the property.  But what if it is only rented a few days here and there throughout the year?  The IRS has specific guidelines regarding dual use (rental and personal) properties and their resulting tax treatment.  Please consult a professional tax advisor for more information.

2. How often can you visit the property?

Like most countries, the United States has specific tax treatment for its residents.  If you are physically present in the US sufficient to be considered a resident for tax purposes, you will be required to report and pay US tax on your worldwide income for the calendar year.  Assuming you have not obtained a green card or US citizenship, you will be considered a US resident if you are physically present in the US for at least:

1. 1. 31 days during the current year, and
   2. 183 days during the 3 year period that includes the current year and the 2 years immediately before. To satisfy the 183 days requirement, count:

a. All of the days you were present in the current year, and

b. One-third of the days you were present in the first year before the current year, and

c. One-sixth of the days you were present in the second year before the current year.

3. Will I have to pay taxes in the US?

At a minimum, you will be required to pay property taxes on your property.  This will vary by state, and sometimes your residency can affect your rate, but Louisiana, Hawaii, and Alabama are known[2] to have the lowest property tax rates, while New Jersey, New Hampshire and Texas are known for the highest!

Whether you are required to file US taxes for other reasons will depend upon the use and/or activity of the property.  If you are using the property as a rental property for at least 14 days in the calendar year, you will likely need to file a US tax return (and possibly a state return as well!) to report the income and expenses associated with the property.  Standard deductible rental expenses include depreciation, mortgage interest, property taxes, utilities and more.

If the property owned is used solely for personal purposes, and you are not considered a US tax resident for tax purposes, you will not need to file and pay US income taxes as a result of ownership in this property.

4. Should I purchase the property individually, or through a company?

The answer to this question depends upon the intended use of the property. If it will be used as a rental property, it may be a good idea to purchase the property through a separate entity as a means of limiting your personal liability.  However, establishing a separate entity (LLC, corporation, partnership, etc) will likely prompt additional Federal and state tax filing requirements.  Furthermore, corporations are generally subject to different tax rates and additional types of income tax, such as alternative minimum tax, accumulated earnings tax, and personal holding company tax.

5. How can I finance the purchase?

While purchasing a property solely with cash may be the most simplistic approach, it is rarely practical.  The large majority of properties in the United States are purchased with a mortgage.  Mortgage rates in the US are comparatively low, and lenders are generally well versed in the process of legal transfer of ownership.  But how easy is it for a foreign resident to obtain a US mortgage?  Unfortunately the answer is: not very easy.  Many US lenders will not make loans to borrowers who do not have a Social Security number or permanent residence in the US.  There are restrictions regarding credit history, visa status and work history.  Unfortunately for nonresidents, much of this information will be difficult to obtain in an acceptable US legal format.  But the good news is that this doesn’t mean that it’s not possible!  While difficult to find, there are lenders who will offer loans to foreign buyers.  The key to financing a US home purchase with US lender is to engage the assistance of professionals that have experience with nonresidents: real estate agents, attorneys and tax advisors.

Buying property in the US is becoming increasingly popular for a reason – market rates are low, mortgage rates are also low, and there are a large amount of properties available.  For whatever reason you’re considering property purchase in the US, it can be done, with the right amount of planning and an experienced team on your side!

[1] http://www.realtor.org/reports/profile-of-international-home-buying-activity

[2] http://taxfoundation.org/article/property-taxes-owner-occupied-housing-state-2004-2009