Over the past five years, the US has experienced an influx of foreign capital being used to purchase real estate, both commercial and residential. Foreign investors looking to escape tepid economic growth prospects or currency devaluation in their home countries, a rout in equities markets or just trying to diversify their investment portfolios often chose US real estate as a safe investment haven.
Orange county, with its great schools, high safety ratings, and relatively attractive home valuations has shown great promise. In 2014, almost eighty percent of new construction in Irvine was sold to foreign investors.
While these purchases provide foreign investors refuge from many economic uncertainties in their home countries, if executed without the proper guidance and understanding of the laws and their respective implications, investing in US real estate can become very costly.
Below are a few considerations that can help foreign investors avoid unexpected tax complications:
- Estate tax – Perhaps the largest tax concern for the buyers is the US estate tax. Generally, a foreign individual is subject to US estate tax on all property situated in the United States. A US estate tax return must be filed and tax (roughly 40%) be paid if the fair market value at death of the decedent’s US-situated assets exceeds 60,000. Gifts of real property located in the US are, generally, also subject to tax.
- 30% tax withholding from gross income – Where a foreign corporation or individual receives rental income, the taxation of such income depends on whether or not the owner is engaged in a US trade or business. Generally, the ownership of real estate is not considered a trade or business if it consists of merely passive activity such as a net lease. In such situations, unless the proper election is made, the gross income is subject to a 30% withholding tax and no deductions from gross income are allowed.
- 15% federal income tax withholding upon disposition – The disposition of a US real property interest by a foreign person is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Under this Act persons purchasing the property are required to withhold 15% of the amount realized on the disposition (sale price). California also has withholding requirements that apply to sales of real estate located in the state.
For more information, contact Yana Weaver, Shareholder at 714.569.1000 or [email protected].
*This article originally appeared in the June 2016 Investment Management issue of the Orange County Business Journal
With over twenty years of experience in private and public accounting, Yana has extensive knowledge in many areas of taxation. She is serving clients in manufacturing, healthcare and real estate industries providing them with entity planning support, transaction structuring, practice entry and exit strategies, cross-border transactions and other important financial matters.