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I am a non resident alien and is thinking of buying a rental

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property in California. The...
I am a non resident alien and is thinking of buying a rental property in California. The agent told me to establish a LLC to hold the rental property for tax saving purposes. But how does it work? Am I personally liable to US federal income tax and California tax? Or it is only the LLC would be liable to tax. What is the difference?

MC
Submitted: 6 years ago.Category: Tax
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3/7/2011
Tax Professional: Richard, Tax Attorney replied 6 years ago
Richard
Richard, Tax Attorney
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Satisfied Customers: 55,803
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Good morning. The LLC would be taxed as a partnership...i.e., it would be a flow-thru entity. If you own it as a sole owner, you would not event need to file a tax return for the LLC; rather you could simply report the results on your Form 1040. Or, at your option, you could have the LLC file an information return...the Form 1065..and then you would get a K-1 which would cause you to report the 1065 information on your 1040.

 

 

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The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.

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Customer reply replied 6 years ago

 

What is the benefit of a non resident alien owing the rental property via a LLC vs in my own name? I do not live in the United States but only visit about 1 week in a year.

 

Do you mean I need to file a non resident US federal tax return and a California tax return to report the rental income each year? And also a return/form for the the LLC?

 

The agent told me I only need to pay withholding tax of 35% and that is it. The management company will pay for me to the IRS and there is nothing more I need to pay or to do??

 

My other friend also told me to use a BVI to hold the LLC and then buy the rental apartment?

 

I also heard that I will have to pay capital gain tax when I sell the rental property some day?

 

I am all confused. All I am looking into is to buy a house in California and rent it out for the time being until my son goes to college in 3 years and he can have a place to stay.

 

Looks like too expensive to buy a place in california!

 

Can you please help. The property agent is on my back!

 

Thanks,

MC

Tax Professional: Richard, Tax Attorney replied 6 years ago
I'm going to opt out and let someone else address all these additional questions for you. Take care.
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Tax Professional: Lev, Tax Advisor replied 6 years ago
Lev
Lev, Tax Advisor
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Satisfied Customers: 30,150
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Hi and welcome to Just Answer!
If your rental property will produce rental income - that income is treated as from US sources and is taxable on the federal level and for California.
For income tax purposes - the single member LLC is treated as disregarded entity (unless the owner selects otherwise) - means all income and expenses are reported on owner's individual tax return. If you are a non-resident - you will have to file non-resident tax return and report all income from US sources - in this case rental income and rental expenses. Net rental income (if any ) will be taxable and you will need to file federal and California income tax returns.

Withholding is made to cover possible tax liability. Your actual tax liability is determined at the time you file a tax return. If your actual tax liability is less than your withholding - you will be entitled in refund.

When you sell a real property you will have either capital gain or loss = (selling price) - (cost basis - mainly purchase price adjusted by improvements and some other expenses). Yes - capital gain if any is taxable income.

In additional California LLCs must pay annual tax to the Franchise Tax Board - minimum tax is $800 - regardless if the LLC has any income.
You may find more information here - http://nolonow.nolo.com/noe/popup/NNLLCCABAS_faq.html
So unless you expect a good income having the LLC in California might be costly.

Let me know if you need any help or clarification.
Lev
Lev, Tax Advisor
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Customer reply replied 6 years ago

 

Thanks Lev, I am getting a clearer picture now...It sounds very expensive to own a rental property in the US.

 

How about owning the LLC via a BVI (British Virgin Island) company? does that relieve me from paying tax to US federal and California government?

 

MC

Tax Professional: Lev, Tax Advisor replied 6 years ago
Because the property is located in the US and in California - the income realized from that property is treated as from US and California sources and is taxable on both federal and California levels regardless who is the legal owner of the property and regardless of the owner's residency.
For rental property - your taxable income is the net income = (gross rental proceeds) - (rental expenses). If your net rental income will be zero - there will not be any income taxes.

Generally - you do not need a LLC - you may own the property directly as a physical person.
A foreign LLC (LLC registered outside California - either in BVI or in any other state) should pay the same annual tax to CA FTB - that is a price for having the LLC in California.

Let me know if you need any help.
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