Tax Considerations For U.S. Real Estate Investors
One important aspect of real estate investment, for example, is the so-called the Foreign Investment in Real Property Tax Act (“FIRPTA”) regime, whereby gain from the sale of a U.S. real estate property interest by a foreign person is treated by default as income "effectively connected" with a U.S. trade or business, which is fully taxable in the United States. A sale of property via an investment vehicle, such as an LLC, is generally considered as sold by the individual member of the LLC for this purpose.
Real estate sales income can qualify for beneficial long-term capital gain rates (the maximum of which is currently 20%), if the property is sold by an individual after being held for more than one year. The FIRPTA withholding rules can, and often do, result in an overwithholding of tax (since tax is withheld on a gross basis). A FIRPTA withholding certificate can reduce such withholding tax if it is properly obtained from the IRS and timely provided to the buyer. Otherwise, the foreign investor can request a refund of the overwithheld tax by filing a tax return (Form 1040-NR) with the IRS, but must wait until after the tax year is over to do so.
Income from a real estate investment that is not treated "effectively connected" income, such as rental income, is generally subject to 30% withholding on a gross basis. A so-called “net election” can be made to treat such income as effectively connected income in order to be taxed on a net instead of gross basis. A host of additional tax and withholding rules may apply depending on the structure of the real estate investment.
Reporting Requirements and Due Dates
For purposes of filing the required annual tax returns, the foreign investor must apply for and obtain an Individual Taxpayer Identification Number (ITIN), which is a tax processing number issued by the Internal Revenue Service. The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a Social Security number (SSN) from the Social Security Administration (SSA).
The ITIN is used for filing tax returns, paying taxes, and claiming U.S. tax refunds. Tax refunds often result from an overwithholding of U.S. tax on payments to a non-U.S. investor in U.S. real estate.
Foreign Investor Filing Services
Our foreign investor filing services include the following:
I. U.S. Nonresident Alien Income Tax Return (Form 1040-NR)If you have rental income from a U.S. property or realized a capital gain from the sale of a U.S. property, you are required to file a U.S. income tax return.
II. Individual Tax Identification Number (ITIN)In order to file your U.S. income tax return, you must have an IRS-issued tax ID number also known as an ITIN.
III. FIPRTA Withholding CertificateIn addition to our tax preparation service, we can assist you with obtaining a FIRPTA withholding certificate that can be used to reduce the U.S. withholding tax upon the sale of your U.S. real property investment.