Nonresident aliens who invest in U.S. real estate face a number of tax risks that can have a significant impact on their investments if not properly addressed. These risks are the result of the fact that nonresident aliens are subject to different tax rules than U.S. residents, and may be subject to harsh U.S. estate taxes at rates up to 40% and FIRPTA withholding tax on dispositions.
FIRPTA stands for Foreign Investment in Real Property Tax Act which is a federal law that requires withholding of 10% – 15% of the gross proceeds of U.S. real property disposed of by a nonresident alien individual or foreign corporation.
However, with proper planning, these risks can be mitigated.
One strategy for mitigating tax risks for nonresident aliens is to own U.S. real estate through a foreign corporation. This can be beneficial because the shares of a foreign corporation are not considered U.S. property for U.S. estate tax purposes. In addition, the foreign corporation can provide liability protection for the nonresident alien individual. However, for nonresident aliens who have already purchased appreciated U.S. real estate, transferring the property to a foreign corporation can result in a capital gain and FIRPTA withholding.
One potential solution for nonresident aliens who have already purchased appreciated U.S. real estate is to make an IRC 897 (i) election. This election allows nonresident aliens to avoid capital gains when transferring property to a foreign corporation and avoid estate tax and FIRPTA. However, it is important to note that making the IRC 897(i) election has significant implications and should only be done after careful consideration. Additionally, it’s worth mentioning that this election can only be applied if the foreign corporation is in a country with a tax treaty with the U.S. and shareholders meet certain requirements.
It is also important to note that nonresident aliens who invest in U.S. real estate may be subject to state and local taxes, including property taxes, and should be aware of these additional tax implications.
In summary, nonresident aliens who invest in U.S. real estate face a number of tax risks, but these risks can be mitigated through proper planning before purchasing. However, for nonresident aliens who have already purchased appreciated U.S. real estate, the IRC 897(i) election may be the best option for avoiding capital gains and estate tax while also avoiding FIRPTA withholding.
It is important to ensure that all applicable tax rules and regulations are being followed, and to ensure that the foreign corporation meets the necessary requirements for the IRC 897(i) election. Our team of experienced professionals can help you navigate the complex tax rules and regulations surrounding nonresident alien investments in U.S. real estate, and develop a strategy that minimizes your tax liability and maximizes your returns.
Whether you’re just starting to explore the U.S. real estate market or you’re a seasoned investor, our firm can provide you with the expert guidance and support you need to make informed decisions and achieve your investment goals. Contact us today to schedule a consultation and learn more about how we can help you succeed in the U.S. real estate market.
We recommend the following resources to learn more about investing in U.S. real estate as a nonresident alien: