- 1 Foreign Nationals Selling U.S. Real Estate for Gain
- 2 What is Capital Gains Tax?
- 3 Foreign Individuals (Non-U.S. Persons) Catch a Tax Break
- 4 Real Estate is Treated Different
- 5 What Does that Mean?
- 6 Unreported Capital Gains or Pay Tax in Prior Years?
- 7 Golding & Golding: About Our International Tax Law Firm
Foreign Nationals Selling U.S. Real Estate for Gain
Foreign Nationals Selling U.S. Real Estate for Gain: The United States has very generous rules when it comes to capital gains earned by foreign nationals. The general rule is that as long as a person is not a U.S. person (aka U.S. Citizen, Legal Permanent Resident, or former Legal Permanent Resident who did not properly relinquish their green card) they are generally not subject to US tax on capital gains (they may still have to pay tax abroad). While this is the general rule, there is a big exception, which provides that a person who buys and sells U.S. real estate must still pay U.S. capital gains tax on the sale (presuming it was sold for gain).
What is Capital Gains Tax?
Capital gains is the idea that when you purchase an asset at one time, and sell the asset at another time, if you made profit off the sale — you should have to pay tax on the profit. Why? Because through the sale of the asset you earned money…and since the U.S. loves to tax you, the U.S. has determined that you should have to pay tax on the earnings. But, in order to avoid losing business to other countries, the United States provides certain exemptions from US tax for foreign individuals.
Foreign Individuals (Non-U.S. Persons) Catch a Tax Break
When it involves Capital Gains, in general when a foreign person owns stocks, bonds, or other securities in the United States and they sell those stocks, bonds, or other securities for a profit, the United States does not tax these individuals on the gain. Moreover, besides the Capital Gain exclusion rules, there are equally generous tax breaks for foreign persons with portfolio income in the U.S. — they do not pay tax on most types of portfolio interest income.
*Depending on which country the foreign person resides, he or she may be subject to tax in their own country on the capital gains, but not subject two US tax.
Real Estate is Treated Different
Real estate is considered unique. Each parcel is different from another, and the laws regarding the purchase and sales of real estate are different. As such, when a person buys and sells real estate located in the United States for profit, they are taxed. The tax is similar to ECI (Effectively Connected Income) and not FDAP (Fixed, Determinable, Annual or Periodical)
What Does that Mean?
It is actually a good thing for the profit to be taxed as ECI and not FDAP. What that means is that as Effectively Connected Income, the profits are taxed as if it were business income. Therefore, a person may take certain deductions or expenses, etc.. When income is considered FDAP, it is taxed at a straight 30% withholding. Therefore, even though a foreign person with U.S. Capital Gains on the sale of real estate will be subject to US tax, they can receive the benefit of any expenses/deductions the property — which generally will significantly reduce the net effective tax rate for the sale of the real estate. There are various definitions of what real property interest includes, and even if a person holds U.S. property in a corporation, they still may be subject to the tax (depending on the level of ownership of the business holding the real estate).
Unreported Capital Gains or Pay Tax in Prior Years?
If you did not report the tax properly in prior years, then you are out of tax compliance and may be subject to extensive fines and penalties. In order to get yourself into compliance, you may consider offshore disclosure – and presuming you are a foreign national who resides overseas and was not willful in their failure to report the tax – you may receive a complete penalty waiver for any penalties that would otherwise be due to the U.S. government.
This is generally done by applying for IRS Offshore Voluntary Disclosure.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.