In our practice, we have worked with many foreign real estate investors, including those from China. Certain tax issues must be understood by foreign investors as investment in US real estate continues to grow. This not only includes annual filing requirements, but also tax withholding upon the sale under FIRPTA.
Those who are not citizens of the United States are determined to be either resident aliens or non-resident aliens for tax purposes. Generally, you are considered a nonresident alien if you did not reside in the US during any part of the tax year.
The vast majority of Chinese clients that we have qualify as nonresident aliens because they do not reside (eve n part-time) in the United States. Most clients must still file state and federal US income tax returns due to their real estate holdings. However, there are a few specific ways they can elect to be taxed and few pitfalls they need to consider before they purchase their first property.
There are three main US tax issues that investors should be aware of, and they are: (1) gift tax; (2) estate tax; and (3) income tax. Depending on the tax situation, there may be some entity structures that could be implemented to make your investments more tax efficient and address any future considerations. Many of these concerns can be alleviated with the proper planning, so you can sleep easy at night.
In addition to these federal tax issues, Chinese investors may also come across specific state tax laws that further complicate the tax-filing process. The US is composed of 50 states, 43 of which impose a state income tax. Some states may have additional taxes and filing requirements that will make the process more complex.
You may encounter tax concerns not only in the United States, but in your home country as well. Foreign investors should be aware of how their US investments will impact their tax situation in their country of residence. Many of these countries will give a tax credit for any taxes paid to the United States, but they will also often tax you on your profits. Make sure that you engage a experienced and knowledgeable tax professional in China who understands these potential tax concerns.
Chinese investors must also recognize that even though the IRS has default or standard classifications that govern how nonresident aliens are taxed, the US has tax treaties with many countries that can in some situations significantly lower your tax liability. The tax treaties are complicated and having a proper understanding of them will require the insight of a tax specialist.
Many investors will find themselves being taxed just like US individuals with the proper tax planning. Tax rates begin at 10% and go up to 39.6%. They will also often find themselves paying rates at the lowest level (if they even pay tax at all), since rental real estate generates depreciation deductions and frequently a passive loss. 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).
Navigating US tax law and filing your tax returns can be a challenging process. Before you buy your first property you should consult with a tax professional. At Sundin & Fish, PLC, we deal extensively with real estate investors from China and we are able 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.