Knowing a few basics about taxes in the U.S. will help you to feel confident as you search for and purchase a home.
PURCHASING: Tax liability is different for foreign nationals than it is for U.S. residents. Here’s a quick breakdown of major distinctions: While the federal tax on long-term investments (more than a year) is 15% for U.S. residents, foreigners pay 30%. Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), income tax is withheld immediately after a non-U.S.-resident sells property. The rate varies from state to state, but the federal rate is a flat 10%. The IRS requires a “Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.” In addition, many states request a “Nonresident Real Property Estimated Income Tax Payment Form.” We recommended seeking the expertise of a professional tax accountant to provide assistance with these forms.
We also recommend consulting with a tax specialist in your home country in general before you buy. An international buyer’s overall tax liability will also differ country to country based on the home country’s tax treaty with the U.S. Therefore it’s best to consult with a tax advisor who is familiar with the tax treaty and its provisions. The capital gains rate for U.S. residents is 20% (if the property was owned for more than one year), but it could be higher if you are from certain countries.
RENTAL INCOME: U.S. law requires that foreign nationals “elect“ to pay U.S. income taxes on any net income earned from rental property. If this election is not made in a timely fashion — and the proper forms are not filed with the IRS — a tax of 30% of the gross rental income will be demanded. Even if the property owner is incurring tax losses initially and doesn’t owe any taxes to the government, tax returns must still be filed in order to make the “election” required by law.
The good news is that international buyers who finance their purchases with a 40% to 50% down payment will generally not pay income taxes on their rental income for the first 10 to 15 years, since the U.S. is very generous when it comes to expenses that can be deducted from rental income. Mortgage interest, common charges, depreciation, property taxes, insurance, and amortization of closing costs can all be claimed as deductions against income, so in the early years, your property will generate negative taxable income and you will not have any tax liability.
CLOSING FROM AFAR: When the property is official closed on and transferred to the new owner, the new owner does not need to be in the U.S. Instead, the owner can provide his or her representative (usually a broker) with “Power of Attorney,” and the representative will close the deal on behalf of the new owner. This is a common practice and can be very convenient for the buyer who does not want to come back to the U.S. for closing. Talk to your realtor about that possibility if it interests you.