Our accounting firm handles many foreign real estate investors, including those from the United Kingdom. There are certain tax issues that foreign investors need to understand as investment in US real estate continues to grow. These issues include not only annual filing requirements, but tax withholding upon the sale under FIRPTA as well.
If you are not a citizen of the United States, it needs to be determined whether you are classified as a resident alien or nonresident alien for tax purposes. This is done following specific tax rules and requirements. You are typically considered a nonresident alien if you have not resided in the US during any part of the tax year.
A vast majority of our British clients qualify as nonresident aliens, since they do not reside—even part-time—in the US. Because of their real estate holdings, most must still file US federal and state returns. There are, however, a few ways they can elect to be taxed and some important potential issues they need to recognize and consider before purchasing their first property.
There are three main tax issues to be aware of and these are: (1) estate tax; (2) income tax; and (3) gift tax. These issues can be straightforward, but certain tax situations may allow for entity structures to be implemented to make your investments more tax efficient and address any future considerations. Many of these concerns can be alleviated with the proper tax planning, so you can sleep easy at night.
Not only are there tax issues in the US, but foreign investors need understand how their US investments will impact their taxes in their home country. Many countries will provide tax credit for any taxes paid to the United States, but they will also often tax your profits. Be sure to contact a qualified tax professional in the UK who is understanding of your real estate investment concerns.
It should also be understood that even though there are standard or default classifications set by the IRS that govern how non-resident aliens are taxed, the US has treaties was various countries that can, in certain tax situations, significantly lower your tax liability. These tax treaties are often very complex and may require the insight of a knowledgeable tax specialist.
With the proper tax planning, many investors will find themselves being taxed similarly to US individuals. These tax rates start at 10% and go up to 39.6%. Since rental real estate will generate depreciation deductions and often a passive loss, many investors—if they are even required to pay—will find themselves paying rates at the lowest level. Upon the sale of the property, the US tax code allows individuals to pay at a favorable long-term capital gains rate of 15% (subject to certain conditions).
British investors will also have to address state tax requirements on top of the potential federal tax issues. The United States is composed of 50 states, and 43 of these states impose an income tax. Specific states may impose additional taxes or filing requirements, which may create an obstacle in the process of filing with the US.
Navigating US tax law and filing the applicable tax returns can be a challenging process. Before buying your first property you should consult with an experienced tax professional. At Sundin & Fish, PLC, we work extensively with real estate investors from the United Kingdom and we are able and ready to review your situation and discuss tax planning strategies.
Education is important to the process, so make sure you have a professional on your side. Call us today at 480-361-9400.
We work with worldwide real estate investors, including (but not limited to) investors from Canada, France, Israel, Australia, Germany, Netherlands, United Kingdom, Sweden, Russia, Japan, China, and Switzerland.