Legal advice needed on how foreigner can avoid paying 30% witholding tax

[Ali Amir]

Hello

As you would have guessed by the subject, I am not a US citizen. I would like to invest in the RE sector of the US economy but all the research that I have read on the internet points to foreigners paying a significantly higher percent of tax on rental property income than locals (30% withholding tax on Gross Income vs 15% on Net Income).

I am not concerned about the benefits of a foreign corporation owing a US LLC and thereby not paying estate tax. I need to know what structure and what business model a foreigner has to adopt to be accepted by the IRS for purposes of paying similar tax as residents on rental income and property flipping.

I would like to thank you for your time for having read my request!

[Paul Sundin]

You are correct that as a general rule you are subject to a 30% withholding based on gross rents.  But you can avoid this treatment.  First, a little background...

Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a US trade or business. A nonresident alien’s income that is subject to US income tax must be divided into two categories:

• 1.Income that is effectively connected with a trade or business in the US, and
• 2.Income that is not effectively connected with a trade or business in the US.

The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate and does not allow any deduction for expenses. Rental real estate is defined as income that is not effectively connected income and, therefore, would be subject to the 30% withholding.

However, if you have rental real estate you can elect to have it treated as a US trade or business for tax purposes. If you make this choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. If you make this election, you must attach a statement to your tax return.

Each foreign investor situation is different.  Make sure that you engage a qualified CPA who understands the tax issues you are facing.