International Real Estate Investment Tax Pitfalls for Americans

Common International Real Estate Pitfalls for American Investors

Common International Real Estate Pitfalls for American Investors

When it comes to investments in general, investing in international real estate can be a great option for US Taxpayers looking to get involved in the world market. There are many great international real estate investment opportunities — which vary depending on the goals and overall investment strategy of the investor. Some investors prefer to purchase foreign properties — hold them –and then sell them for profit. Other investors prefer to rent them out and claim as many deductions as possible. In fact, even a property that is located abroad is eligible for certain deductions on the US tax return — similar to that of the US property — but the IRS is never too far away. Let’s go to some of the basics of investing in international real estate:

Taxed on Worldwide Income

If you are a US person, such as a US Citizen, Lawful Permanent Resident, or Foreign National who meets the substantial presence test — then you are required to pay US tax on your worldwide income. Therefore, it does not matter that you may have obtained second citizenship such as a golden visa and are renting out a property that you own overseas. The baseline perspective is the US taxes individuals on their worldwide income, including rental income from international real estate.

Foreign Country Rules for Real Estate Ownership

The next level of tax may involve the foreign country in which the real estate is located. Even though you may be a US person and reside in the United States, many countries have very specific rules when it involves real property located in their country — even when the owner resides outside of the country. And, even when the type of tax is similar (such as income tax) — you have to be careful of the tax rates as well — such as Greece, in which the tax rate for rental real estate income is relatively high.

Additional US Income Taxes on International Real Estate Income

Beyond just incomes taxes on real estate, many foreign countries may levy additional taxes on the real estate rental property within its borders that generates the income. This may come as a big surprise to US persons who have spent their entire life in United States dealing with that headache of a tax system — and are not familiar with the additional tax schemes that many foreign countries have. While the foreign country may have relatively lower income tax brackets — there maybe extensive property and other taxes. Moreover, if you are residing in the country and qualify as a foreign resident — then you may have additional tax on your worldwide income from that country (most foreign countries tax residents within their borders on worldwide income). Finally, if the taxes are not the same or similar to the types of taxes levied in the United States, then you may not have any tax credits to draw from.

Holding Foreign Real Estate Foreign Corporation 5471

If you open a foreign corporation in order to own the foreign real estate — you may become subject to extensive reporting requirements in United States. While the ownership of foreign real estate is not normally reportable on a US tax return (income is still taxable) — those rules change if you are holding it in a foreign corporation. It is usually reported on a Form 5471.

Per Se Rules for Foreign Corporation

If you are holding the international real estate in a foreign company — and just presume that you are going to disregard the entity — that may not even be an option under the US disregarded entity rules. The Internal Revenue Code and/or Code of Federal Regulations identify several types of foreign corporations which cannot be disregarded — and are referred to as per se corporations. In addition, if the company qualifies as a Controlled Foreign Corporation — then you may have the additional headache of GILTI and possibly Subpart F Income.

PFIC and International Real Estate

A PFIC is a Passive Foreign Investment Company and the tax rules involving PFICs can be very brutal. Income that would typically be taxed at a 15 or 20% tax rate is now taxed at 37 percent tax rate — in addition to annual accrued interest — which depending on how long the income was held in the company before distribution could lead to+50% in net income tax liability.

Planning to Invest in International Real Estate

It is important to fully analyze and evaluate any tax implications or consequences of the ownership and investing in international real estate before taking the plunge.  If you are seeking ownership of the international real estate and are considering relinquishing your lawful permanent resident status or renouncing your US citizenship — then you may consider formal expatriation before making the investment.

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.