Purchasing real estate can pay off in a big way – depending on what you plan to do with the property, of course. But as an expat living overseas, you’ll want to be sure you ask these important questions and do proper expat tax planning before jumping into a large investment, since there are many ways your expat tax situation can be affected.
1. What are your plans for the property?
How you plan to use the property actually has a significant impact on how your US expat tax planning will be affected. For example, will it be:
- A second residence?
- A fixer upper?
- A rental property?
- Or something in between?
It’s important to note that if the property will be a rental, you’ll probably need to report the earnings and deductions from the property – but it ultimately depends on how many days out of the year the home is rented. You can read more about how rental property affects your expat taxes in this article.
2. Will I have to pay US taxes?
At a minimum, you can expect to pay property taxes to the state in which the property is located. The other types of taxes you’ll be required to pay will depend on how you use the property. As mentioned above, there are specific guidelines for what requires you to report income and deductions for rental properties by filing state taxes.
If the property you own is used only for personal purposes and you aren’t considered a US tax resident for expat tax planning purposes, you won’t be required to file US expat taxes to report this property. For more expat tax tips and advice, download our tax guide to US taxes.
3. How often can I visit the property?
Not unlike other countries, the US has guidelines in place for tax treatment of its residents. If you’re physically present in the US and meet the guidelines for being a tax resident, you’ll need to report and pay US tax on your worldwide income for the calendar year. If you don’t have a Green Card or US citizenship, you’ll be considered a US resident for expat tax planning purpose if you’re physical present in the US for at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 year immediately before. To satisfy the 183 days requirement, you’ll count:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
4. Should I purchase the property individually, or through a company?
This will hinge on how you intend to use the property. Planning to rent it out? It might be a good idea to purchase it through a separate entity to limit your personal liability. You should note that the process of establishing a separate entity (like an LLC, corporation, partnership, etc.) would open you up to additional Federal and state filing requirements. Also, corporations are generally subject to different tax rates and other types of income tax, so you’ll want to ensure you make an educated decision about how you should go about purchasing the property.
5. How should I finance my purchase?
In some cases, property purchases are done with cold, hard cash. But, the reality is, that’s usually not practical – and thus, most properties are mortgaged. However, as a foreign resident, the process of obtaining a mortgage in the US isn’t the easiest since most lenders won’t make loans to borrowers without a Social Security number or permanent residence in the US. But it’s not impossible! There are some lenders out there who will work with foreign buyers, so take the time to find lenders, real estate agents and expat tax planning advisors with experience in working with non-residents.
Need Help Understanding Your Expat Tax Obligations?
Our team of expat-expert accountants can help you understand how property investing will affect your expat tax planning – contact us today to learn more!