Non Resident Property Owners
Formally the IRS refers to non-residents as Non Resident Aliens.
If you are considering investing in US real property, as a non-resident, you could find yourself liable for the following US taxes.
Tax on Rental Income
The Standard withholding tax rate is 30% on rental income, as discussed in the FAQ's, filing form
W8-ECI will allow your US rental agent to pay gross rental income. If a US return (Form 1040NR) is
filed claming property expenses and mortgage interest and depreciation allowance then the income will
be taxed at progressive US rates from 15% through to 35%. However, in the early years of ownership the
expenses and allowances are significant and usually mitigates tax on rental income. In some states,
but not Florida, State Income Tax will be also be due.
Capital Gains Tax (CGT)
The US tax code provides for both short term (less than one year) and long term (greater than one year) capital
gains. The rates for short term are significantly greater than that of long term capital gains with a maximum
rate of 15%. The catch 22 here is that under a US tax law called FIRPTA in which the purchaser or his agent;
usually the Title Company must withhold 10% of the gross selling price and pay that amount to the IRS on account
of any Capital Gain or other tax that might be due from a non resident alien. A 'Withholding Certificate'
application can be made to expedite refund of the majority of the withholding, but strict rules on timing
and handling of the application apply. There are also special rules if the property is sold to a 'homesteading'
purchaser.
Inheritance Tax (IHT)
This can be a shock to non-residents. US Estate tax rates offer a generous exemption, non-residents aliens
cannot benefit beyond a $60,000 exemption allowance. They are then subject to progressive rates rising to
47%. In some states a State Inheritance Tax can be levied on top of the Federal IHT or as a deduction from
the Federal IHT. If you give away title to your property during your life, there is a wholly separate Gift
tax, with its own rules to consider before making such a decision.
General summary
US Income and Capital Gains tax rates are fairly low. Inheritance Tax is a real problem and needs to be carefully
planned for. Non-resident owners of real US property also need to ensure they have a US Will to cover their US
assets. A UK or other foreign Will is unlikely to be accepted for Probate in the US.
If any U.S. tax advice is contained in the body of this communication, it was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. This statement is required by, and is intended to comply with, United States Treasury Regulations.