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 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. 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.
- It is capital gain.The 15% is a required withholding amount to insure the US gets the tax. The foreign entity can file a nonresident tax return to claim back some if the gain is lower than the sale.
- When the sell occurs the 15% is on the sale price. Filing 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 less costs to sale.The depreciation recapture aspect may mean a higher gain than expected.
- Seller would be given a 1042S by the buyer. It 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. The copy of the 1042S is given to the seller so they have proof when they file.
Usually when the seller is a nonresident alien too, 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 the acquisition of a U.S. real property interest from a foreign person is reported and paid over using 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 other person responsible for closing the transaction must report the sale of the property to the IRS using Form 1099S.
- 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 a mid year, the buyers will need to file 1040NR too, because they have source of income in the US. 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.
Tax Forms Summary:
4797 (Sale of Business Property)
Schedule E (Rental Income)