With tax season in full swing, now is the time to gather your information and documents and begin expat tax planning. If you’re a property investor or plan to become one, you may have more complicated questions in mind when it comes to expat taxes. Here are four common questions and answers that may help you better understand your tax obligations.
1. Will I need to file state or local taxes?
It depends where your property is located. Some states have no income tax, while others do – which means filing state taxes will be dependent on the rules in your home state. Own a business? Some states also require a tax or fees paid on various business structures established within the state if properties are held in an LLC or similar structure. When expat tax planning, it’s always a good idea to consult with an expat tax professional so you’re aware of your tax obligations.
2. How does buying or selling real estate affect expat taxes?
Real estate transactions abroad will have a drastic effect on your expat tax planning, as any gains on the sale of real estate are subject to taxation. However, it’s important to note that if you’ve lived in the home as your principal residence, you will be able to exclude up to $250,000 (or $500,000 for those who are married filing jointly). Even if the real estate income was abroad, it isn’t considered foreign earned income, so you won’t be able to exclude it with the Foreign Earned Income Exclusion.
You’ll also need to consider currency fluctuations, as it can affect how much capital was really earned by your purchasing and selling of real estate abroad. Gains from real estate can put you into a different tax bracket and dramatically increase your US expat tax obligation. Real estate abroad is something that shouldn’t be taken lightly – you should talk to an expat tax expert to get a better understand of the effects before investing in real estate.
3. What are my tax filing requirements as a non-resident property investor in the US?
When it comes to expat tax planning, your requirements will depend on the type of entity you choose to make your investment and the number of investors:
- An individual or single-member LLC with direct ownership will file a Form 1040-NR (which is due by June 15th each year).
- A foreign corporation would file Form 1120-F.
- A multiple-member LLC (foreign or domestic) would file Form 1065 and each partner would receive a K-1 and would need to file Form 1040-NR individually, while domestic partners would file Form 1040.
- Domestic corporations would file Form 1120 within 3.5 months of their fiscal year-end.
4. What is the best way to own an investment property in the US?
The US is one of the most litigious countries in the world, which means you should strongly consider owning your properties in a corporate entity such as a Limited Liability Company (LLC). This will help reduce your personal liability in the event something happens on your property. Also, if you own multiple properties, you may want to consider grouping them in different LLCs, so if something happens on one, it will not impact the other properties. As always, it’s a good idea to consult with a tax professional before coming to a decision, as there are many ownership options.
These are just a few of the questions you may encounter as you begin expat tax planning. Consulting with an expat tax professional is always recommended, especially since you’ll have additional reporting requirements as a property investor. For more expat tax planning tips and ways to save money, download a US expat tax guide today.
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