Tax and Legal Issues For Foreigners Buying US Real Estate
Answers to FAQ’s of Foreign Buyers and Sellers of New York Real Estate
by Pierre Debbas, Esq., of Romer Debbas LLP
- Can a foreigner buy property in the US?
A foreigner can buy property in the US. It is usually easier to purchase a condominium, rather than a cooperative. Cooperatives require all purchasers to be interviewed and they legally have the ability to reject a buyer without providing a reason. Cooperative boards also ask for extensive personal and financial information and do not cater to non-resident owners. Typically, condominiums have an easier review process which involves the condominium board waiving their right of first refusal to buy the apartment. Additionally, condominiums allow purchasers to buy in the form of a trust, domestic LLC or a foreign corporation. All three vehicles can provide liability protection and tax planning advantages to a foreign buyer.
- When buying a property in New York City, what taxes does a foreigner need to pay?
A nonresident alien does not need to pay a specific tax due to their residence status. All purchasers potentially have to pay the following taxes when purchasing a property in New York City:
- Mansion tax of 1% of the purchase price, if the purchase price is over $1 million. If the purchase price is over a million then mansion tax is due.
- For certain purchases of a new development property, developers, or sponsors typically require the purchaser to pay the transfer taxes on the deal. New York City transfer taxes for properties under $500,000 are 1% of the purchase price and for properties equal to or over $500,000, the transfer taxes are 1.425% to the New York State. New York State transfer taxes are .4% of the purchase price regardless of the value of the property. If the property is not a new development, then the purchaser will not be responsible for transfer taxes.
- A purchaser who obtains financing will have to pay a mortgage recording tax. The mortgage recording tax for properties under $500,000: 2.05%, of which .25% is paid by the lender and for properties equal to or over $500,000: 2.175% of which .25% is paid by the lender.
- When selling a property in New York City, what taxes does a foreigner need to pay?
A foreign person needs to pay gains tax and FIRTPA withholding tax. Federal Gains tax is currently 15% of the net capital gain. Net capital gain is the amount of the gain on the property with the original purchase price, closing costs, and capital improvements (renovations), subtracted out. Similarly New York State charges an 8.82% non-resident gains tax on the net capital gain.
A foreign seller is also charged a Foreign Investment in Real Property Tax (FIRPTA). The FIRPTA withholding tax is discussed below.
- What is FIRPTA?
FIRPTA is a withholding tax required of a foreign seller. The FIRPTA withholding tax amounts to roughly 10% of the gross sales price. If the seller is current on all of their other taxes owed to the IRS (i.e. income taxes, capital gains tax, etc.) then they should receive a refund of the 10% that was withheld at the sale.
Trusts with foreign beneficiaries and foreign corporations that sell a US property must withhold 35% of the amount realized on the sale.
- What is the Death Tax and do foreigners have to pay this?
Foreigners have to pay New York death tax if they own property in New York when they die. Any tangible or personal property located in the U.S. and valued over approximately $60,000, requires the filing of a New York estate tax return when the foreign person dies. Currently, New York estate tax has a rate of 16%.
Foreign persons are also subject to Federal estate tax on property owned in the U.S. when they die. Currently the estate tax rate can be as high as 35%. U.S. citizens are given an individual exemption from the tax up to 5 million dollars. Married couples are currently exempt up to 10 million dollars. However, non U.S. citizens are not granted the exemption, unless a treaty exists with their country. See the discussion on treaties below. As a result, property valued above $60,000 is subject to estate tax. Discussed below are suggestions of vehicles that can be created to avoid Federal Estate tax including an irrevocable trust and a foreign holding company.
- What are the advantages and disadvantages of buying in the name of an individual?
Currently, long term capital gains tax rates are 15% for individuals and there is no capital gains treatment for C corporations. Federal corporate tax rates can be as high as 35%. What this means for the foreign buyer is a tax savings on the capital gains on the sale of the property if it is held individually as opposed to a standard corporation. However, these taxes can be avoided, and the foreign person can obtain the Federal capital gains tax rate of 15%, by creating an LLC. LLC’s allow individuals to be taxed at their own individual tax rate, instead of being subject to the high corporate tax rates of 35%. As a result, there is not a significant advantage in tax treatment to a foreign buyer if they own a property individually.
While there is not a significant difference in tax treatment between owning the property individually or through an LLC, there is a difference in liability protection. Owning a property individually can subject the foreign buyer to lawsuits in the U.S., whereas, an LLC can protect the foreign buyer’s assets outside those owned by the LLC from liability. An LLC can also provide the foreign buyer with additional privacy protections, as purchasers of property in New York are required to register their ownership with the city and state and these registries are accessible to the public in online databases.
If a foreign person wishes to purchase the property individually, they can create an irrevocable trust to hold the property. An irrevocable trust will avoid estate tax when the foreign person dies. In addition, a trust can provide similar privacy protections to a corporation.
- What are the advantages and disadvantages of buying in the name of a US corporation or LLC?
As noted above, owning a property through an LLC or US corporation can provide liability protection and additional privacy to the foreign buyer. Unlike a corporation, an LLC provides the foreign person the ability to be taxed at their individual rate, as opposed to corporate tax rates. However, owning the property through an LLC alone, will not avoid estate tax. In order for a foreign person to avoid estate tax, they can create a New York LLC in addition to a foreign holding corporation such as a BVI, which is a corporation formed in the British Virgin Islands. Provided the BVI is the member of the New York LLC, the foreign person can avoid estate tax on US owned property. Under this structure, the IRS views the ownership of the property as an intangible asset, which is not subject to estate tax.
- What is a Tax Treaty and how will that affect my tax liability?
The US has tax treaties with many foreign countries. Under these treaties, foreign residents are taxed at reduced rates, or are exempt from U.S. taxes on certain items of income. These reduced rates and exemptions vary from country to country. Many of these treaties also cover Federal estate tax and provide certain residents of foreign countries a pro-rated amount of the Federal Estate tax exemption of 5 million dollars for individuals.
If there is not a treaty between the buyer’s country and the U.S., or if the treaty does not cover Federal estate tax, then a foreign person is subject to Federal estate tax on the value of the property over $60,000 when they die. The IRS currently has copies of the tax treaties between the U.S. and foreign countries available on its website:
- Am I treated differently for tax purposes if I buy a property?
A foreign person is not treated differently when they buy the property for tax purposes. However, as noted above, buying a property in the name of a trust or a foreign holding corporation such as a BVI can avoid estate tax in the US and provide additional liability and privacy protections. However, purchasing a property through a trust or an offshore company will not avoid Federal capital gains tax or FIRPTA withholding tax on the sale.
- How do I obtain a TIN?
A taxpayer identification number (TIN) is required by the IRS to file all tax returns in the U.S. There are four different types:
Social Security Number
To obtain a social security number you must submit evidence of your identity, age, and U.S. citizenship or lawful alien status in addition to completing a form SS-5 with the social security administration. The social security administration’s website is listed below:
Employer Identification Number
An employer identification number is used by business entities as well as trust and estates. You can apply for an EIN online through the IRS website:
Individual Taxpayer Identification Number
An Individual Taxpayer Identification Number (ITIN), is a tax number for certain nonresident and resident aliens, who cannot get a Social Security Number (SSN). It can be obtained by filing a W-7 application with the IRS.
Preparer Taxpayer Identification Number
A paid tax preparer must apply for a Preparer Tax Identification Number (PTIN) on the IRS’ website.