Foreign Nationals and Real Estate

Foreign Nationals and Real Estate

December 15, 2015

What are some of the tax implications of owning U.S. property as a foreign national?

Life insurance can provide planning solutions for the unique U.S. tax challenges that Foreign Nationals face. Resident and Non-Resident Aliens are not entitled to the unlimited marital deduction.

 In other words, transfers to non-U.S. citizen spouses may be subject to U.S. gift or estate tax. Non-Resident Aliens who directly own certain U.S. assets are exposed to U.S. estate tax liability and only $60K may be exempt from U.S. estate tax.

 This includes foreign investors who are taking advantage of historically low real estate prices and/or interest rates to obtain investment properties or second homes in the U.S and maybe unknowingly subjecting themselves to U.S. estate taxes.

One of the most common issues faced by foreign buyers of U.S. real estate is deciding how to take the title of real estate being purchased. If foreign buyers to take a title in their name, the good news is that when they decide to sell their property, the gain will be taxed at the long-term capital gains rate. The current long-term capital gains rate is determined by your tax bracket assuming the property was held for more than one year and can range from 0-20 percent. 

However, when it comes to estate taxes, the foreign buyer who holds the title in his name is taking a significant risk because if he passes away while owning U.S. real estate, the entire value in excess of $60,000 is going to be subject to a tax at rates as high as 40 percent.

If you're a U.S. green card holder it’s a different story. One new provision of the 2018 Act impacts the use of foreign “blocker” corporations to insulate U.S. situs assets from estate tax at the death of a non-resident alien.  A change to the definition of a controlled foreign corporation will make it impossible for U.S. citizens or residents who inherit assets held through a foreign blocker corporation to avoid treatment as a controlled foreign corporation.  Thus any planning utilizing foreign blocker corporations should be reviewed by an experienced estate planning attorney. 

There are additional risks surrounding foreigners owning rental property. Anyone who owns U.S. real estate that is operating as a rental property is entitled to take a tax deduction for depreciation, mortgage interest, property taxes, expenses of management and repairs, etc. The benefit is that income tax is only paid on the net rental income, assuming that there is a profit after the deduction of all of the rental expenses. 

 Resident Aliens who have been high earners or have a net worth in excess of $2,000,000 or fail to meet certain other requirements may be subject to significant expatriation taxes if they cease being U.S. residents.

 A life insurance policy can provide the liquidity necessary to pay U.S. estate tax and/or complement a comprehensive U.S. estate plan. It can also help an estate keep U.S. property and retain the full value of the estate as it reduces the need for forced-sale situations to come up with quick cash to pay tax liabilities upon the death of a Foreign National.