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How are US properties owned by foreigners taxed? Background…

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How are US properties owned...
How are US properties owned by foreigners taxed?Background info:
1) Owners reside in Taiwan and do not stay in the US for more than 90 days a year.
2) Owners do not have any visa or residency in the US.
3) They plan to purchase one single family home with all cash and rent it out as an investment.Specifically we are trying to understand the following:
1) How is the rental income taxed? Can they claim depreciation expense?
2) How is the property taxed when sold at a profit?
3) How is the property taxed if it is gifted or willed to their daughter who is a US residence?Thank you!
Submitted: 3 months ago.Category: Capital Gains and Losses
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3/29/2018
Tax Expert: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 3 months ago
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Capital Gains and Losses
Satisfied Customers: 1,151
Experience: Former IRS Revenue Agent
Verified

I'm Fiona, former IRS revenue agent. I am looking at your question and will get back to you soon. Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP,IMTA

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Tax Expert: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 3 months ago

Dear Customer,

1) "1) How is the rental income taxed? Can they claim depreciation expense?"

Yes, they can claim depreciation expenses. Many foreigners and foreign companies own properties in the U.S.

The rental income is taxed as regular U.S. residents because this is U.S. source income. They also need to file State income tax return for the house' state. The only investment income exempt will be like stock and bond purchased on the stock markets through brokerage firms.

They must have some one or some agency in the U.S. to handle the property for them.

It is suggested that you make further inquiry into the matter and details. If it is a partnership, S corporation, or individual. It is very unlikely that they purchase the house in their own names and left to remote control.

2) How is the property taxed when sold at a profit?

It is similar to U.S. residents. The owners will need to file tax return to report the income and pay tax due.

3) How is the property taxed if it is gifted or willed to their daughter who is a US residence?

Subject to rules and regulations of gift tax and estate tax as regular U.S. residents.

The enclosed IRS website links are enclosed for your further information. The first one is on foreigners with rental income in the U.S. The second one is on the gift tax return instructioins for all, including foreigners with property in the U.S.

https://www.irs.gov/individuals/international-taxpayers/foreign-persons-receiving-rental-income-from-us-real-property

https://www.irs.gov/businesses/small-businesses-self-employed/forms-and-publications-estate-and-gift-tax

Regards,

Fiona

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Customer reply replied 3 months ago
Hi Fiona,Thank you for your prompt response. So the 30% withholding tax in the first IRS link is referring to the withholding of taxes, not the actual tax rate. Is that the correct understanding?They are trying to figure out what is the most beneficial way for them to own title. Either as an individual or as a corporation. Is there any special benefit for a foreigner to hold title as a corporation or partnership?Thanks,Nikki
Tax Expert: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 3 months ago

Dear Customer,

If they are the landlord, they receive rental income. The tax return they prepare is as U.S. residents with regular income tax brackets.

The income tax withholding standard quoted by the IRS is usually when others are giving them money. In this case because they will receive rent income directly, there is no tax withholding applicable.

If they own corporation, they will be subject to double taxation. They cannot own S corporation. They can own partnership with their daughter. But foreigners being partners can have more headache in reporting. They can own LLC and reporting as partnership or as individuals on their own tax return.

If they can find a tax return preparer to do all the tax reporting for them, form a LLC with or without daughter to report partnership income is the best way. It provides some type of protection to distant themselves from the property.

Buy various kind of insurance is the most important thing. Hire a management company instead of using the daughter to manage the place.

This is actually not a good idea at all. Have they heard about horrible U.S. renter stories with unlimited lawsuit possibility?

Buy a house to let the daughter stay. That is. Forget about rental or renting. Buy a piece of land. Buy an empty house for investment and let it stay that way for the market to grow.

Residential rental managed from overseas is a headache and time bomb waiting to happen.

Regards,

Fiona

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