Investing in the United States FAQ’S
1. Can a foreign citizen purchase real estate in the United States?
Yes, a foreign citizen can purchase property in the United States and may purchase using a trust, a domestic LLC, or even a foreign corporation. Each of these business structures can help give buyers extra protection against liability, and grants tax advantages to foreign purchasers.
2. What is “FIRPTA”?
FIRPTA is a withholding tax that all foreign sellers of property are required to pay to ensure they have no outstanding obligations to the IRS.
When a foreigner purchases property in the U.S., the buyer’s representatives are responsible for withholding between 10% and 15% of the sale proceeds and submitting such amounts to the IRS.
Note: the amount withheld is refunded when it is found the taxes on the property are up-to-date.
3. Are foreign owners of US property required to pay the estate tax?
Common in many countries, “estate tax,” or tax that must be paid on the value of someone’s estate when they have died. If foreign citizens own property in the United States at the time of their death, they will be subject to this tax. You may encounter a state tax as well as a Federal tax:
• In New York State, the maximum estate tax rate is 16%.
• On the federal level, the United States is up to 46%.
Leveraging your “boots on the ground” team and resources, may help foreign buyers maximize U.S. tax treaties or set-up Foreign Corporations or LLCs as a hedge.
4. What advantages or disadvantages are there when purchasing property as an individual rather than a corporation or LLC?
Buying as an individual
Pros: Individuals pay capital gains taxes at a slightly higher maximum rate (23.8%) than corporate entities pay their federal taxes (21%).
Cons: less privacy and increased liability in case of lawsuits.
Buying as an LLC or a Foreign Corporation
Pros: Extra privacy and lawsuit protection. If the LLC has a foreign buyer as the sole member, pays a capital gains tax of 23.8% vs. the corporate rate of 21%. If buying as a foreign entity, the buyer avoids the estate tax upon death
Cons: Higher capital gains tax. If the buyer is an LLC as a sole proprietor, the buyer is liable for estate tax. If the LLC is a foreign entity, they pay capital gains tax as high as 21%
5. How will my home country’s tax treaty impact my tax liabilities?
The U.S. has numerous tax treaties with other countries which determine tax rates and exemptions. Some foreigners can claim estate tax exemptions up to $11.2 million. Other treaties don’t cover estate taxes at all, limiting a foreign property buyer’s estate tax exemption to a nominal $60,000.
6. What is a I.R.C. 1031 exchange and can foreign buyers use it?
When an investor sells an investment property, that investor can defer all of their capital gains taxes if they choose to invest 100% of their net gain from the sale into the purchase of a new investment property in the United States. This is called a “1031 transaction”, and it’s something that a foreign buyer can use to avoid capital gains taxes as well as FIRPTA (see #2).
Note: if a foreign seller chooses to utilize this exchange, they must identify their new investment property within 45 days of a sale and must close on that property within 180 days.
