Real estate is a popular investment choice for non-U.S. investors, but foreign investors need to take careful considerations when looking to invest. These considerations include income, business structure and the property value, to name a few. With no one-size-fits-all, investors need proper planning and advice to avoid possible tax and penalty complications.
What is the U.S. Estate Tax Exemption?
While U.S. citizens and persons who are deemed to be domiciled can enjoy an estate tax exemption in 2022 of $12,060,000, that figure does not apply to nonresident aliens. The exemption amount for a nonresident alien decedent is actually only $60,000, and any amount that exceeds that figure is subject to estate tax that ranges anywhere from 26% – 40% . The estate tax exemption applies to all assets, not just real estate. Real estate property falls under the blanket estate tax exemption if the property is an asset in a decedent’s estate.
What Taxes are Nonresident Aliens Responsible For?
If a business entity or revocable trust holds U.S. properties they may be required to file annual federal and possibly state tax returns.
- Lessors of U.S. property or recipients of rental income of that property must file a Form 1040-NR U.S. Nonresident Income Tax Return for the income.
- State and city taxes may also be levied.
- Reports may also need to be filed with the Financial Crimes Enforcement NEtwork (FinCEN) or the IRS, including the FBAR and Form 5472.
Failure to file may result in fines, and if not resolved, the property can be seized or sold at auction, and nonresident aliens with a federal tax lien can have their information shared with the Department of Homeland Security.
Can Visits to the U.S. Impact Taxes?
Visits exceeding 183 days in a given year or over a three-year period (see below example) can impact residency status for tax purposes, which would subject an individual to tax on worldwide income and foreign financial assets and accounts as well as additional filings for any interest in a foreign business and bank accounts. The United States calculates this by using the substantial presence test.
For example:
The above individual would not qualify as a resident under the substantial presence test.
To avoid the substantial presence test, individuals should limit visits to less than 120 days of presence each calendar year. There are also other ways to avoid being considered a U.S. resident for tax purposes, including job roles (certain visas), professional athletes temporarily competing in a charitable event, or if time was spent stateside due to a medical condition occurring while visiting the U.S. Additionally there are exemptions for closer connections. Individuals that do meet the exemption should file IRS Form 8843.
As foreign individuals look to invest, it is helpful to know the intricacies of the U.S. and foreign tax system. Foreign investors holding real estate properties or other assets in the U.S. are encouraged to seek the advice of a tax consulting and accounting firm that specializes in the intricacies of U.S. tax reporting as it applies to international investors and trust holders.