Central Park New York Casas Office

Tax implications for foreign nationals buying property in the U.S.

//How to minimize taxes when buying property?

Buying an apartment or property in New York City is an exciting and often intense experience. It is important to surround yourself with knowledgeable professionals, not only to find and secure the right property, but also to set up the right legal structure to minimize tax implications. As explained in this page, the best way for foreigners is to buy a property through a LLC.

//Income Tax

It is important to know that the IRS (Internal Revenue Service) requires foreigners to pay US income taxes on any income in/from the United States. Rental income is subject to a flat 30% withholding tax (unless reduced by an applicable income tax treaty).

Ownership through LLC does not eliminate income tax. However, the depreciation and operating expenses of your investment or pied-à-terre will often result in a tax shield for many years.

//Capital Gains Tax

When a foreigner sells property in the U.S., he/she must pay capital gains taxes (FIRTPA withholding tax). The IRS will withhold 10% of the gross purchase price of the property. When a US Tax Return is submitted reporting the capital gains tax, if there is any refund due, the money will be refunded to seller. Capital gains tax for US residents and companies is 15-20%, whereas the capital gains tax for direct foreigner ownership is 30%.

Ownership through LLC eliminates the 10% withholding procedure (FIRPTA) and reduces the capital gains tax.

//Transfer Tax - Mansion Tax

Transfer taxes are generally paid by the seller of the property. One exemption to this is on new developments, where the purchaser is requested to pay the transfer taxes on the sales price. There is a City Transfer Tax and a State Transfer Tax. In New York City, transfer taxes for properties under $500,000 are 1% of the purchase price. For properties equal to or over $500,000 the transfer taxes are 1.425%. New York State Transfer Taxes are 0.4% of the purchase price, regardless of the value of the property.

In New York, there is an additional tax called the Mansion Tax, which is 1% over the value of properties of 1 million dollars or more. The Mansion Tax is paid by the buyer

//Inheritance Tax

In the case of death of the owner, an inheritance tax needs to be paid on the owned property. Any tangible or personal property located in the U.S. and valued over $60,000 requires the filing of a New York Estate Tax Return when the foreign owner dies. Currently, New York Estate Tax has a rate of 16%.

Ownership through LLC cancels the risk of having to pay US inheritance tax and defers the inheritance tax to the country of residence – A corporation or LLC cannot die.

//Gift Tax

Should you choose to gift your property at some point in time to relatives or friends, then this would trigger a gift tax. Gift Tax is imposed at a rate of 40%. In terms of gifting, an individual who is neither a U.S. citizen nor domiciled in the U.S. can make annual exclusion gifts of $14,000 per year to anyone and can currently pass $143,000 per year to a spouse who is not a U.S. citizen through a free of gift tax.

Ownership through LLC defers the Gift Tax to the country of residence.

//The solution: A U.S. based Limited Liability Company (LLC)

American legal entities owned by foreign nationals are not considered foreign for U.S. tax purposes. As a result, it is beneficial for foreign buyers to set up a U.S. based LLC to purchase the property. Not only does this have tax benefits, but corporate ownership also shields the buyer from any personal lawsuits in the U.S. In this case, the investor’s foreign assets are never at risk. Furthermore the LLC provides the foreign buyer with additional privacy as he does not have to publicly register his ownership of the LLC.

Contact us and we will put you in touch with lawyers that can advice you on this matter.

//What is a Tax Treaty and how will that affect my tax liability?

The U.S. has tax treaties with many countries. These treaties allow foreigners to be taxed much less, or be exempted from U.S. taxes on certain items. Visit the IRS website to find out more about what tax treaties exist between the U.S. and your country.