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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1699
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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I am a non resident alien and am intending to buy a property

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I am a non resident alien and am intending to buy a property or properties for investment purposes.. they should be rented out either short term or long term... I wish to put them into individual LLCs to make the most of any tax deductions.. they can be either bought cash or with a 50% mortgage if that is more tax effecient... what would be the status of taxation ? would they have to be classed as a business? is this indeed the advisable way to go?
Submitted: 4 years ago.
Category: Tax
Expert:  Anne replied 4 years ago.
Hi Mandry22

Can you please tell me what kind of visa you are in the US on and how long you have been here? Are you planning on becoming a green card holder or a citizen?
Customer: replied 4 years ago.
I am not in the USA, I am resident in Spain and also flit between Dubai, so my interest in US is for investment purposes only.... I have been in NY last August/September (we could say black lehman bros time) on a visit but dont have any intention of becoming resident or working at this present time... I am in real estate professionally and have a whole lot of problems to sort out in the UAE with investments that have gone really pear shaped! this new attempt at a couple of investments in the US is a toe in the water excercise... if it works well then I have quite a few clients from my client base to propose the same sort of vehicle to. I prefer to learn by doing before I recommend further.

thanks a lot
Expert:  Anne replied 4 years ago.
Thank you for that additional information. Investment income is normally taxed at a flat tax rate of 30% without regard to any expenses/deductions that you may incur.

However, since this is rental property, you may make the election to treat this rental property as "effectively connected income" with a trade or business. This would allow you to deduct your expenses related to the rental property (such as mortgage interest, real estate taxes, improvements, etc) You make this election by including a statement with your first tax return that includes income from any US rental properties. Please see below:

Income From Real Property

Publication 519 (2008), U.S. Tax Guide for Aliens

Publication 527 (2009), Residential Rental Property

I hope this helps.
Customer: replied 4 years ago.
Hi Anne,
With the 30% flat tax rate..... does this only apply to individuals? or does this include LLCs?
Can an individual owner elect to call himself a "trade or business"?
Does this mean only LLcs can deduct expenses or can individuals deduct?

Seeing these properties would be rental properties in any case - in your opinion - does it make sense to add additional cost of incorporating a LLC for each property. ... is there much of a difference in filing a tax return for a LLC holding property as opposed to a tax return for an individual?
leading to another question regarding inheritance tax what is the case should a shareholder in the LLC die - and what happens in the case of an individual ownership if the owner or part owner dies?
Expert:  Anne replied 4 years ago.
The 30% tax rate will apply if the LLC is structured as a "pass thru" entity such as an S Corporation or Partnership. It is possible to set up an LLC as a C Coporation, but that is rare for rental properties since the income is taxed twice, once at the corporate level and once at the individual level when the C Corporation pays the individual in dividends.

For legal purposes, if you want to limit your liability, then an LLC is a good idea. Tax wise, any LLC that is a "pass thru" entity as described above (most commonly real estate/rental property LLC's are structured as partnerships) the tax laws are pretty much the same as they are for individuals, since the LLC itself is not taxed. All income and expenses flow thru the LLC straight to the partners or shareholders depending on the entity formed.

As for what happens when an owner or partial owner dies, under any LLC, whether it be a Partnership or any other type of entity, there should be spelled out in the LLC agreement what happens to the person's protion, either allowing that portion to be inherited, or the survivor purchasing the other person's share for either Fair Market Value on the date of death, or any other method that the members agree on.

I hope this helps.
Customer: replied 4 years ago.
Thanks for your answer,

I think onhand with what youve said, it would make sense to have a partnership.... this would be with myself and my daughter who is also non resident, German nationality - I dont think she would look to obtain a green card or work in the US ( however you never know in the distant future).
If either one of us were to pass away - we would like the other to inherit that part... what sort of inheritance tax would there be in this case?
Expert:  Anne replied 4 years ago.

There currently is no tax forms that need to be filed unless the estate exceeds $3.5million dollars for tax year 2009. This is the most current information that I have to date. Please see below:

 

Publication 950 (12/2009), Introduction to Estate and Gift Taxes

 

 

Non resident aliens are subject to the same estate rules for properties and holdings they have in the US.

 

I hope this helps.

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1699
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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