Non-resident aliens may come to own property in the United States for an array of reasons. Some non-resident aliens may purchase property because they see it as a stable and sound investment opportunity. Aside from the potential appreciation in property values, owning U.S. real estate can also provide regular rental income. Other non-resident aliens may seek to purchase U.S. property because their son or daughter is coming to study or work in the United States and needs a place to live. Others may purchase U.S. property because they expect to come to the U.S. to live and work in the foreseeable future.
Regardless of your reasons for purchasing U.S. property, there will likely come a time when it no longer serves your purposes and goals. At this point, the non-resident alien may be inclined to transfer the property. Often, discussions regarding the disposition of U.S. property will occur during conversations concerning estate planning. Unfortunately, the failure to properly plan the transfer can mean that the individual may pay significant amounts of transfer taxes. In fact, careful tax planning can allow a non-resident to accomplish a tax-free transfer.
Non-resident aliens who wish to transfer U.S. property to loved one can be subject to the gift tax. The gift tax will apply to non-resident aliens when they transfer tangible property located in the United States. Tangible property includes U.S. real estate along with other tangible personal property. Tangible personal property can include a vehicle, jewelry, antiques, and other valuables that are in the U.S.
The gift tax is not imposed on intangible property held by the non-resident alien. This wrinkle in the gift tax law can be leveraged by wealthy non-resident aliens to engage in a tax-free transfer of U.S. real estate. Non-resident aliens can transfer their otherwise taxable U.S. property through a U.S. or foreign corporation to avoid potential gift tax implications. The most important aspect to consider is whether the property is owned by an entity that the IRS will recognize as a separate and distinct entity from the individual.
While both a U.S. and the foreign corporation can be utilized, often, a U.S. corporation will result in a better tax outcome. This approach to the issue avoids any potential foreign corporation branch profits tax issues or analysis. However, there are also certain risks inherent in the U.S. corporation approach to the tax-free transfer of U.S. property.
The main concern when engaging in the foregoing to avoid tax on the transfer of property is that the current owner will pass away before the transfer can be completed. It is essential to note that the $5.49 million in estate tax exemptions available for the estates of U.S. persons is not available for non-resident aliens. Rather, non-resident noncitizen estates only receive the equivalent of a $60,000 tax exemption from the estate tax. Thus, ensuring that the plan is carried out in a timely and expeditious manner is essential to ensuring that the gift tax is avoided legally without incurring the consequences of the estate tax.
If you are a non-resident alien who is considering transferring property to the next generation or for other purposes, a tax-free transfer may be possible. However, such a result will require careful transfer tax planning and proper legal execution. To discuss how you may be able to avoid transfer taxes, contact the Tax Attorneys and CPAs of the Tax Law Offices of David W. Klasing. To schedule a confidential reduced rate consultation, please call our Irvine or Los Angeles tax law offices at 800-681-1295 or schedule online today.