Real estate is one of the most lucrative investment opportunities, not just for domestic investors, but for foreign investors as well. However, when any non-U.S. person makes an investment into an inherently domestic vehicle, there are tax implications which require careful consideration.
For example, the U.S. estate tax exemption applies differently for nonresidents, even in the context of real property. Nonresidents are responsible for filing a number of different forms that a U.S. citizen might not have to worry about. The amount of time that the nonresident spends stateside can also impact their tax requirements.
Managing all of these critical aspects of tax compliance can be difficult without the help of a seasoned Dual Licensed International Tax Lawyer and CPA. To schedule a reduced-rate case evaluation with the Tax Law Offices of David W. Klasing today, call us at our offices at (800) 681-1295 or click here.
The U.S. Estate Tax Exemption
Many people think that the estate tax is 40% on any taxable amount. In fact, for most of the federal estate tax tiers, you’ll pay a base tax plus a marginal rate. Current federal estate taxes max out at 40% for taxable amounts greater than $1 million. Data published by the IRS shows that fewer than 0.1% of U.S. estates must file tax forms, with only 0.04% of estates paying tax. Still, in 2020, the tax generated $9.3 billion of revenue for the federal government.
While U.S. citizens and persons who are deemed to be domiciled in the U.S. (here with an intent to stay indefinitely) can enjoy an estate tax exemption in 2022 of $12,060,000, that figure does not apply to nonresident aliens. The exemption amount for a nonresident alien decedent is actually only $60,000, and any amount that exceeds that figure is subject to estate tax that ranges anywhere from 26% to 40%. The estate tax exemption applies to the fair market value of all U.S. situs assets, not just U.S. real estate.
Nonresidents Owning U.S. Real Estate at Death May Be Responsible for a Variety of Tax and Information Returns
If a business entity or revocable trust holds U.S. property, the entity may be required to file annual federal and possibly state tax returns.
Lessors of U.S. property or recipients of rental income of that property must file a Form 1040-NR, U.S. Nonresident Income Tax Return. Form 1040-NR should include information about the lessors and the property, including the income that the lessor derives from renting the property. State and city taxes may also be levied, depending on where the property is located.
In addition to tax returns, nonresidents may also need file information returns with the Financial Crimes Enforcement Network (FinCEN) or the IRS. Examples of common information returns include the Report or Foreign Bank and Financial Accounts (FBAR) and Form 5472. Information returns do not require the payment of taxes, but rather the disclosure of material information on the assets and the ownership of these assets.
Failure to file may result in substantial fines. If the fines go unresolved, U.S. property can be seized or sold at auction, and nonresident aliens with a federal tax lien can have their information shared with the Department of Homeland Security.
If you are delinquent on U.S. tax or information return filings, there are options for you to return to a state of tax and information reporting compliance and reduce or avoid the related civil and criminal tax and information reporting ramifications.
A Nonresident’s Visits to the U.S. Can Impact Their Taxes
Visits exceeding 183 days in a given year or over a three-year period (see below example) can impact residency status for tax and information reporting purposes via meeting the substantial presence test, which would subject an individual to tax on worldwide income and foreign financial assets and accounts as well as additional information filings for any interest in a foreign business and bank accounts.
The substantial presence test is met when the nonresident individual is physically present in the U.S. on at least 31 days during the current year, and 183 days during the three-year period that includes the current year and the two years immediately before that. All of the following days will count towards that 183-day total:
- All the days you were present in the current year
- 1/3 of the days you were present in the first year before the current year
- 1/6 of the days you were present in the second year before the current year
To avoid the substantial presence test, individuals should limit visits to less than 120 days of presence in each calendar year. There are also other ways to avoid being considered a U.S. resident for tax purposes, including job roles (certain visas), professional athletes temporarily competing in a charitable event, or if time was spent stateside due to a medical condition occurring while visiting the U.S. Additionally there are exemptions for closer connections.
Because the substantial presence test is one of a few particularly complex issues in the tax code that cause mistakes every year, we encourage you to seek the advice of a dedicated Dual Licensed International Tax Attorney and CPA if you think you may have inadvertently met this test.
Learn More About Tax Requirements for Nonresident Property Owners from the Tax Law Offices of David W. Klasing
Get help today with your questions about remaining compliant with U.S. tax code from the Tax Law Offices of David W. Klasing. Schedule your first case evaluation for a reduced rate with our Dual Licensed International Tax Lawyers and CPAs by calling us now at (800) 681-1295 or scheduling online here.
