Foreign individual direct ownership

[Danay Ramirez]

Income tax: A foreign investor receiving rental income from U.S. real property must pay income tax. Usually, the rental income is considered effectively connected with a U.S. trade or business, and therefore, it is taxed under the effective regime. This means that the tax is calculated on the net rental income (i.e., income - expenses).

Individual foreign investors pay income tax at graduated rates up to almost 40%. However, after depreciation and other deductions, foreign investors usually end up paying an effective tax rate of 20% or less.

Capital gain tax: Upon the sale of the property, foreign investors will pay capital gain taxes on the gain of the property (Capital gains = selling price - cost - selling expenses). Unlike corporations, individuals are eligible for favorable capital gain rates of 15% - 20%. This is a vital advantage of this ownership type.

Withholding taxes: A foreign person’s U.S. real property interest disposition is subject to income tax withholding under FIRPTA. The transferee must deduct and withhold a tax rate of 15% of the total amount realized by the foreign person on the property’s disposition. This withholding is an estimated tax on your potential capital gain taxes.

Estate and gift taxes: If a foreign investor buys U.S. real estate under their name, the real estate property will be subject to U.S. estate tax upon the death of the foreign investor. This is the main disadvantage of owning the property at the personal levelForeign investors are generally subject to an estate tax rate of up to 40% on the property’s value above the allowed exemption of $60,000. Executors for foreign investors must file an estate tax return or Form 706-NA.

Tax compliance: If a foreign investor owns U.S. real estate under their personal name, they must file individual income tax returns with Form 1040-NR. This requirement is another significant disadvantage of individual ownership.

Repatriation of funds: One valuable advantage of individual ownership is the repatriation of funds. After selling the property, paying the taxes, foreign investors can bring their money back to their home country without any additional U.S. tax implications. Unlike corporations, there is no double taxation when owning the property personally.

Summary: Individual ownership is the simplest and most cost-effective way of owning U.S. real estate. This structure offers lower income and capital tax rates compared to other entity options.

However, owning real estate under your name has disadvantages such as the imposition of the estate tax, the requirement to file individual income tax returns in the U.S., and the consequential lack of anonymity.