Global Real Estate:
Transaction Tools
Chapter 4: Tax Matters
In This Chapter
•
•
•
•
•
•
Taxpayer status—resident and nonresident
Physical and substantial presence tests
Income taxes for foreign property owners
Capital gains tax
Estate tax
Foreign Investment Real Property Tax Act
(FIRPTA)
• Nontax reporting requirements
Page 56
Taxpayer Status
• U.S. citizens and resident aliens pay tax on
worldwide income
• Nonresident aliens pay tax only on U.S.sourced income
• All real estate is U.S.-sourced
• Tax treaties
Page 57
Substantial Presence
• Present 31 days in current year
AND
• Weighted average of 183 days over 3 years
including current year, triggered in 3rd
year
• Qualifies as resident for income tax (not
immigration)
Page 58
Taxpayer Identification Number
(TIN)
• Taxpayer Identification Number
• Employer Identification Number (EIN) for
corporations
• Required for real estate business
• Allow 8–10 weeks for application
Page 59
Income Tax for Foreign Real Estate
Owners
• 30 Percent Withholding
OR
• Effectively Connected Income (ECI)
• Foreign owner may choose
• IRS approval needed to switch
• Best choice depends on overall tax liability
Page 60
Withholding Agents
• Property managers as withholding agents
• FACTA
– Requires foreign financial institutions (FFIs)
and U.S. withholding agents to implement
new procedures
Page 61
Taxable Income
Net Operating Income (NOI)
– Cost Recovery
– Interest
– Amortized Points
= Taxable Income
Page 61-62
Cost Recovery
• Annual deduction for a portion of the cost
of an asset
• Non-residential real estate—39 years
• Residential rental property—27.5 years
• Lowers basis
• At sale, gain attributable to depreciation is
recaptured and taxed at 25%
Page 62
FIRPTA
• Buyer must withhold 10% of sale price—not
gain—and remit to the IRS within 20 days of
closing
• Exempt: personal residence under $300,000
(buyer or family member must occupy the
residence for 50% of time for 2 years)
• Commercial real estate
• Investor (or agent) must withhold 30% of gross
rental income
• 10% of sales price
• Changes pending
Page 62-63
Adjusted Basis
Purchase Price
+ Capital Improvements
- Accumulated Cost Recovery
=Adjusted Basis
Basis for capital gains tax
Page 65
1031 Tax-Deferred Exchanges
1. Property must be held for investment or productive
use in trade or business; dealer property does not
qualify.
2. Property must be exchanged for like-kind property.
3. Replacement properties must be identified within 45
days after the relinquished property is transferred.
4. The exchange must be completed (replacement
property received) by the earlier of 180 days or the tax
return due date.
•
Page 65-66
Both exchanged and relinquished properties must be
located in the U.S.
Estate Tax
• Exemptions and credits for federal estate
and gift tax depend on resident or
nonresident status
– Figured differently for estate tax
• No marital deduction
• Noncitizen surviving spouse—even if legal
resident—pays tax on total estate
including personal residence
– Qualified Domestic Trust (QDT) can mitigate
impact
Page 66-67
Forms of Ownership
• Direct ownership
• Indirect ownership through a U.S. entity
–
–
–
–
–
–
Sole proprietorship
General partnership
Limited partnership
Limited Liability Corporation (LLC)
C Corporation
S Corporation
• Indirect ownership through a foreign entity
Page 67-69
Foreign Ownership: Required
Reports
• Business enterprises with 10% foreign
ownership (BEA)
• Subdivisions of 100+ lots (CFPB)
• 10+ acres of farm, ranch, timber land, or
under 10 acres with $1,000 revenue (USDA
Farm Service Agency)
• State requirements
Page 69-71
Key Point
Review
Page 73-74