If you are considering investing in a U.S. business, or if you own a business in the U.S. and plan to have foreign investors, you should learn more about how the taxation of foreign investors in U.S. real estate works.
There is tax on foreign property owners and specific laws govern taxation in these circumstances. These laws are very complex, and it is always important to work with an experienced commercial real estate lawyer on your business dealings.
Even if you are considering investing in residential real estate as a second home or a vacation home, you should learn more about taxation of foreign investors in U.S. real estate.
There are many factors that can impact how a foreign investor will be taxed. These are the key elements involved in determining the taxation of foreign investors in U.S. real estate.
Residency Status of the Foreign Investor
The foreign investor’s residency status can be extremely important in determining how and whether taxes get paid.
If you own real estate or have invested in real estate in the U.S. but you are a non-resident, then the Internal Revenue Service (IRS) likely will only require you to pay taxes (federal taxes, and in some cases state taxes) on any income you earn from real estate within the US.
To be clear, both non-resident aliens and non-resident corporations are only required to pay taxes on earnings from property that is situated within the United States.
However, if you are a U.S. resident, the IRS will require you to pay taxes on any income, earnings, and other assets both within the U.S. and in other parts of the world.
Income and Earnings from Renting Property You Own in the United States
If you own property in the U.S. and rent it out, you will be required to pay U.S. taxes on any profits you make from the property. This is true for non-resident aliens, non-resident corporations, and residents of the US.
The amount of tax a non-resident alien pays on rental property depends upon a couple of different factors. Generally speaking, non-residents pay a federal tax of 30 percent of the gross received from rental income. However, if the non-resident classifies the rental as a business, then it can be taxed at graduated rates. In the latter situation, the non-resident is also eligible for deductions.
The Foreign Investment in Real Property Tax Act
In addition, if you sell the property, your residency status will not have any bearing on whether you will be required to pay federal tax on the sale.
To be clear, both residents and non-residents must pay federal income tax on earnings generated from the sale of a property in the U.S.. Under the Foreign Investment in Real Property Tax Act (FIRPTA) non-residents are also required to pay a withholding tax, but there are exceptions.
Learn More from a Tax Attorney
Taxation of real estate for foreign investors can be extremely complicated. Accordingly, you should always discuss your tax situation with an international tax lawyer who has experience assisting clients with issues specific to the taxation of foreign investors.
Contact me for more information.
Timo Becker
Timo Becker works with U.S. business owners throughout America and overseas, and he also assists people from German-speaking countries looking to invest or start a business in the United States.
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