Foreigners Investing In Real Estate in the US
Tax Implications When Foreigners Investing In Real Estate in the US
- The tax would be reported to the US because the property is located in the US. Under the treaty, it states ARTICLE 6 Income from Real Property1. Income derived by a resident of a Contracting State from real property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income. The sale of real property is defined by the location of the property under the US sourcing rules. An LLC is a pass-through entity in the US, so the sale passes through to the shareholder. Persons purchasing U.S. real property interests (transferees) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% of the amount realized on the disposition.
- Capital gain. The 15% is a required withholding amount to ensure the US gets the tax. The foreign entity can file a nonresident tax return to claim back some of the gains is lower than the sale.
- When the sale occurs, 15% is the tax that needs to be withheld on the sale price. Then the non-resident (the foreigner) files a US return 1040NR to show the expenses and the true gain on the sale. As these are rental use properties, the depreciation claimed is subtracted from the cost price, so the gain may be larger than expected. The gain is the difference in cost plus improvements less depreciation and the sale price fewer costs to sale. The depreciation recapture aspect may mean a higher gain than expected.
- 1042S shows the tax withheld, and then on the 1040NR, the tax is reported as a payment. The IRS gets a copy of the 1042S as well from the buyer. And the buyer, who files 1040NR, can get some of the payment back then.
- The closing would be done in the US, so the US closer or ATTORNEY would be the one to issue the forms 1042S and 8288. A withholding agent is any person, U.S. or foreign, that has control, receipt, or custody of an amount subject to withholding under chapter 3, who can disburse or make payments of an amount subject to withholding.
- The buyer is really responsible or the buyer’s agent for providing 1042S and the 8288 forms. The money is going to a nonresident alien, and the money is US-sourced because the property is in the US that is being sold. So the buyer (or their agent) withholds and remits that to the US and reports it to the US on 1042S. A copy of the 1042S is given to the seller, so they have proof when they file. Usually, when the seller is a nonresident alien, they have a US agent do this that knows about US tax law.
- Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. The tax withheld on acquiring a U.S. real property interest from a foreign person is reported and paid overusing Form 8288. Form 8288 also serves as the transmittal form for copies A and B of Form 8288A. In most cases, the real estate broker or another person responsible for closing the transaction must report the property’s sale to the IRS using Form 1099S. The seller is the one that is holding the actual liability to withhold the 15% tax.
- http://www.keytlaw.com/usrealestatelaw/checklist-for-buying-us-real-estate/ You may find the above site helpful.
- The buyer will have 1040NR and Schedule E, while the seller will need 1040NR, Schedule E, Form 4797 (this one reports the sale).
- If the sale date is in mid-year, the buyers will need to file 1040NR, too, because they have a US income source. Both parties will need to file 1040NR to show their share of income/loss for the operations during the months/weeks they owned the property.
Realtors are usually not familiar with tax requirements regarding foreigners.
When a foreigner is looking to invest in Real estate in the US, the first thing I notice is that the tax system where they are from is much different from the US system.
Under Code Section 1445, the seller of any US property MUST withhold 15% of the amount they realized on the sale if the buyer is a foreign person. The seller is responsible for withholding 15%. The sellers must report the withholding on tax forms 8288 and 8288-A. They have 20 days after the sale to report the tax withheld.
If the seller fails to withhold and report the tax, they expose themselves to penalties from the IRS.
So, who the foreign person in terms of the IRS is? Any foreign corporation, foreign individual, any other foreign entity.
Who is the seller? A domestic or foreign corporation, qualified investment entity, fiduciary of certain trusts or estates. Withholding may also be reported in 1042 under certain conditions.
Another error is that property managers ask their renters for a W-9 to fill out instead of a W8-BEN-E (entities) or W8-BEN (individuals).
Buying a Business in the United States
Let’s say a European company wants to own a US company. This will be considered an acquisition. So, the two companies will continue their existence just like before the acquisition. If the European company wanted to do a merger, they would choose one of the companies merging the two companies. (Only one company would remain in existence.)
In the acquisition case, the European company would put Net Assets at Fair Market Value of the acquired company on its Balance Sheet. Sometimes such a purchase would create a Goodwill or a Bargain Purchase, an additional asset or equity. Also, net income or loss from the US company’s investment would be reported together with the Parent’s Profit or Loss.
Now, as for the US company: it continues to do whatever business it has been doing.
As for its bookkeeping: it will be based on the agreement with the buyer. There will be a special invoice from the seller to the buyer. It is important to assign prices to each asset so the IRS doesn’t question its values. As for GAAP, you must assign FMV to assets with the remaining amount assigned to Goodwill. The prices must also be disclosed to the IRS on form 8594.
Some recommend posting the Revenue from the sale to ‘Proceed of Sale of Business’ Account – and ‘Costs of Business Assets Sold’ and ‘Accumulated Depreciation-Business Assets sold.’
If this results in an income or a loss- that’s what is reported later during the tax season.
ALSO important, these transactions are eliminated when filing taxes as a consolidated tax return because technically, it is just moving money around within your own business (since it is consolidated as purchased 100%).
The US company will report as being owned by a foreign company. This means the foreign company will file its own foreign tax return showing these subsidiaries. This will be a 1120F form. It is due April 15th.
In this 1120F, it will report Income from U.S. Sources, which means income generated by the US company during being owned by the foreign corporation.
Also, the European company would have to get an EIN.
If the purchase were in a mid-year, the US company would have to submit their own tax return on the form they were using for taxes before being purchased (for example, 1040, or S-Corp or C-Corp or 1040NR and 1120 as a transmittal that it is being owned by a non-US resident (this one is a new law)). This will be just for that portion of time when the European company does not own the US company. Additionally, the US company will be a subsidiary for another portion of the year and listed in 1120F. So, there are 2 tax returns for the US company if purchased during a year.
As for accounting/bookkeeping work: there should be a separate accounting account for the US company and its US source income owned by the European Company. $210- $1,000- $1,500(for complex accounting)
Some taxpayers consider getting a Green Card to lower their tax liabilities because they are under the impression that US taxes are lower than everywhere else in the World.
Once an individual receives their Green Card, they start being taxed on worldwide income. It means ownership of a non-US asset, pension from a non-US employer, bank accounts, non-US mutual funds, foreign life insurance, tax information returns are all that need to be reviewed and included with your tax returns. Otherwise, you may be subject to severe penalties.
Even if the Green Card holder moves back to their native country, they will still pay tax on Worldwide income. Having your Green Card expires is not a way out of Worldwide tax liabilities.
There are ways to resolve your taxes owed voluntarily. It is up to the IRS to approve your requests or not. You may need to seek help from a qualified tax professional to minimize your tax burden.
Every 5 years, US persons are required to file Form BE-10. Penalties for not filing this form can be severe (up to $48,192 and up to one-year imprisonment if the person willfully fails to file BE-10.
Harvard Law School at https://corpgov.law.harvard.edu/2015/06/06/what-you-need-to-know-on-form-be-10/ has more information about form BE-10.
According to Harvard Law School, The BE-10 applies to a U.S. company that had direct or indirect ownership or control of 10% or more of the voting stock (or its equivalent) of a non-U.S. business enterprise any time during its 2014 fiscal year. US corporations must file fully consolidated U.S. domestic business enterprises Form BE-10.
Reference: Harvard Law School
There is a final regulation under the global intangible low taxed income and subpart F income provisions of the Internal Revenue Code regarding
the treatment of income that is subject to a high rate of foreign tax at this link:
If you are a United States shareholder of a foreign corporation, you must read it.