Wondering if a non-US citizen can buy property in the USA? Good news! Anyone can buy property in the US, regardless of their citizenship. However, you’ll need to be aware of your US tax obligations.
Can a non-US citizen buy property in the USA?
Non-US citizens can buy property since there is no citizenship requirement for real estate sales. In fact, foreigners can even qualify for a mortgage if they meet certain requirements. However, foreign property owners do face a more challenging tax situation than US citizens.
Understanding tax rules before you buy property in America will help you make the most of your investment. Below is a breakdown of exactly what foreign property owners need to file in the US and what they should anticipate paying taxes on when renting out a property or selling one in the US. For instance, you’ll want to know in what situations a 1040NR is necessary, and if 30% withholding needs to be taken out automatically from payments. So, read our ten quick facts on buying property as a non-US citizen!
10 Quick Tax Facts About Buying Property as a Non-US Citizen
1. IRS Publication 515
The first thing you need to know about buying property as a non-US citizen is that IRS Publication 515 summarizes the rules for nonresident aliens (NRA). The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted by Congress to impose a tax on foreign persons when they sell or receive income from a US real property interest.
2. Tax Rates
In general, income from real property located in the US that is owned by a nonresident alien is taxed at a 30% (or lower treaty) rate if it is not effectively connected with a US trade or business.
3. You Can Choose How Your Property Income Is Treated
If a nonresident alien owns or holds interest in property located in the US for the production of income, then the NRA can choose to treat all income from that property as income effectively connected with a trade or business in the US. The choice will apply to all income from real estate located in the US. If the choice is made, then deductions can be claimed attributable to the real property income, so net income will be taxable.
4. Elections to Make
How do you elect this? The choice can be made by making a Section 871(d) election.
5. Why Elections Matter
The election makes a big difference, which is why you should consider the implications before buying property as a non-US citizen. For an example, if rental property gross income is $30,000, without the election, the income tax would be $10,000 (30% of $30,000). With the election, deductions such as mortgage interest, property tax, etc. would reduce the taxable income and the tax payable would be 30% of the net amount.
6. Tax Treaties
Tax treaties might provide a reduced tax rate.
7. Gains Impact the Taxation
When a nonresident sells a property in the US, any gain is taxed as if the property had been sold by a US citizen or resident. This means the gain may qualify for lower long term capital gains treatment, provided the property has been held for more than 12 months.
8. Withholding Tax
Nonresidents will be subject to a 15% nonresident withholding tax on the gross sales proceeds of the transaction—unless the nonresident has a specific exemption from the withholding. A petition for exemption would need to be filed with the IRS in advance of the sale date to get a certificate of exemption (Form 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests). A lower rate of 10% applies to dispositions under $1 million for US property that was acquired as personal property.
9. State Tax
Depending on the state, there may be state tax withholding or tax liability.
The NRA would be required to file a timely 1040NR tax return to report the income from real estate and any associated withholding if the 871(d) election is made. Foreign persons are required to obtain a US Taxpayer Identification Number (TIN) to file a tax return.
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