Foreigners who are interested in investing in US property will certainly have some tax ramifications arise. Plus, there are rules as to how to purchase, operate, and sell US real property. Find out what you need to know before investing in US property.
Investing in US Property? Get to Know FIRPTA
The Foreign Investment Real Property Tax Act (FIRPTA) is important to foreigners interested in investing in US property because it levies taxes on nonresident aliens and foreign corporations if they have Effectively Connected Income (ECI). ECI is defined as income someone receives when engaged in a trade or business within the US. So, when you sell a US property and realize a gain, the gain qualifies as ECI.
The rates of withholding for FIRPTA are dependent upon who owns the real property and the type of interest disposition.
Foreign Property Investment Withholding Rates
When a foreign person (or foreign partnership, estate, or trust) sells real property in the US, the withholding is calculated at 15% of the sale price. But, keep in mind that withholding rate shouldn’t be greater than the actual tax liability. Foreign property investors can apply for a reduced withholding rate by using Form 8288-B, which requests a withholding certificate.
The rates change for foreign corporations. If you’re a foreign corporation who sells a real US property, the income distributed to the foreign shareholders will use a 21% withholding from the capital gain realized from the sale.
Domestic Partnerships Investing in the US Property Market
When domestic partnerships sell real US property, the 15% withholding rate does not apply. Domestic partnerships are required to pay 35% of any gain distributable to the foreign partners. Domestic corporations that have foreign shareholders won’t have to pay FIRPTA taxes upon the sale, however. Since the corporation is domestic, they will be subject to the corporate tax rate of 21%.
Rental Income Taxes for Foreign Corporations
Any domestic rental income that is received by foreign corporations may face additional taxes on the distribution of earnings that is commonly referred to as the branch profits tax. Foreign corporations may be subject to an extra 30% branch profits tax. Depending on which country the foreign corporation is based out of, a tax treaty may reverse this obligation. If there is no tax treaty, then the corporation can play to pay the full rate of 30%. Sometimes, foreign corporations will choose to use domestic corporations as an instrument to go between the property and the foreign corporation, and in certain situations, this is a way to help mitigate the tax.
A little silver lining: foreign people investing in US property indirectly via offshore corporations are not liable for US income taxes directly or US tax-filing obligations. But, keep in mind that offshore corporations may be subject to US income tax pertaining to the investment operations and might be required to file annual US returns. But despite the taxes, the offshore corporations will typically not need to disclose the identity of the foreign owners.
Foreign persons who obtain ECI may also trigger state and local income taxes, which can be an extra hassle during tax time. Whenever you are investing in US property, it’s important to speak with a trained tax expert to avoid accidentally triggering extraneous tax filing obligations.