If you are not a U.S. citizen but plan to invest within the United States, it is imperative that you understand the United States Tax Rules and Regulations and how it will affect you. Foreigners are required to pay a substantial tax, but there may be ways to avoid it.
Purchasing Real Estate as a Foreigner
Foreign buyers often find themselves in a dilemma when it comes to purchasing U.S. property. Before a foreign buyer decides to purchase real estate in their own name they should beware of the Estate Tax.
What is an Estate Tax?
An Estate Tax is a total of everything that is owned at the time of death. The Estate Tax essentially is a tax on your right to transfer your property at the time of death. This tax varies greatly depending on the citizenship of the owner.
If a foreign individual buyer holds the title in his or her name at the time of death, the entire value in excess of $60,000 will be subject to a minimum tax rate of 35% and a maximum tax rate of 40%.
If a U.S tax resident, green card holder or American citizen holds the title at the time of death, and their assets do not total more than $5.45 million, their assets will not be subjected to an estate. Also, all assets can be transferred to a spouse estate tax-free.
Avoid Estate Taxation
Foreigners are subjected to a large Estate Tax if the property is in their individual name. However, if the foreign individual owns U.S. property in a foreign corporation or trust, the individual will not be subject to estate tax on that property because the shares of a foreign corporation are considered non-U.S. situated assets for U.S. estate tax purposes. Purchasing property as a foreign corporation or trust protects themselves against paying a high tax rate on their estate. This is a savings of at least 35% in estate taxes on the value of the U.S. assets charged when the foreigner passes away. However, be aware of the costs to manage and the costs of annual taxable income in this structure.
Owning U.S. Assets as a Foreigner
Federal law requires U.S. citizens and resident aliens to report any worldwide income and assets, including income from foreign corporations, trusts, foreign bank and securities accounts.
If you are a foreigner either buying or selling property in the United States, it is important to consult with a tax professional beforehand.