Held by Foreign Individual
Some Alternative Methods for Foreign Investor to Take Title to U.S. Residential Real Property
BENEFITS AND BURDENS OF SOME
ALTERNATIVE METHODS FOR A FOREIGN INVESTOR TO TAKE TITLE TO
U.S. RESIDENTIAL REAL PROPERTY
U.S. Residential Real Property held by a FOREIGN INDIVIDUAL
U.S. Income Tax
(a) Upon Receipt of Rental Income. If a nonresident makes a protective election to be treated as “engaged in a U.S. trade or business,” then he is taxed on the net income (namely, deductions are allowed); otherwise, taxed at 30 percent of gross rent received, without deductions for mortgage interest, property tax, depreciation, etc.
(b) Upon Sale. The sale of U.S. real property by a nonresident alien is subject to income tax at the capital gains rate of 15 percent (plus California taxes at a flat rate). A withholding system ensures the tax is collected (namely, the transferee is required to deduct and withhold 10 percent Federal (and 3 1/3 percent California) of the amount realized on the transfer, unless transaction is for purchase of a personal residence for $300,000 or less or a certificate to reduce the withholding amount has been issued). Thus, nonresident alien would have to file an income tax return to collect a refund. The nonresident alien would not be entitled to the $250,000 exemption, as they did not live in the house as their principal residence and declare worldwide income as resident for U.S. income tax purposes for at least 2 out of 5 years prior to sale.
- Disposition of Assets. Does not provide for an orderly disposition of assets upon death of grantor.
- U.S. Gift Tax. The future transfer of U.S. real property by a nonresident alien is subject to gift tax. However, there is an annual exclusion of $11,000 per donee, adjusted for inflation. Also, they can make gifts to Non-U.S. citizen spouses up to $100,000 per year, tax free (IRC § 2523(i)(2)).
- U.S. Estate Tax. A nonresident alien is subject to U.S. estate tax on any U.S. situs property that the person owned at death (IRC §§ 2103 and 2104). The U.S. estate tax on U.S. situs assets of a nonresident alien decedent ranges from 18 percent on the first $10,000 to 55 percent on assets over $3 million (IRC §§ 2101(b) and 2001(c)). The IRS allows nonresident aliens a unified credit of $13,000 on their estate tax liability.
- Anonymity and Liability. The nonresident alien loses all privacy and has unlimited liability.