In our practice, we work with a variety of foreign real estate investors, including those from Japan. As investment in the United States continues to grow, there are certain tax issues to be aware of as a foreign investor. This includes filing requirements, as well as tax withholding upon the sale under FIRPTA.
If you are not a US citizen, specific rules apply to determine if you are a resident alien or nonresident alien for tax purposes. Generally, you are considered a nonresident alien if you did not reside in the United States for any part of the tax year. This describes a vast majority of our Japanese clients. Most still must file US federal and state income tax returns due to their real estate holdings, but there are a few specific ways they can elect to be taxed and a few pitfalls to consider before making an initial real estate property purchase.
The three main tax issues to be aware of are: (1) gift tax; (2) income tax; and (3) estate tax. Some of these issues are rather straightforward, but certain tax situations call for the implementation of entity structures to make you r investments more tax efficient and address any future considerations. With proper planning you can alleviate many of the concerns and sleep easy at night.
Japanese investors should also understand how their US investments will impact their personal tax situation in their home country. Other countries often give a tax credit for any US taxes you pay. However, these countries may also tax your profits. Be sure to consult with an experienced tax specialist in Japan who is knowledgeable of the issues you face.
Even though the IRS has standard or default classifications that govern how non-resident aliens are taxed, foreign investors should be aware that the US has tax treaties with many countries. These treaties, depending on your tax situation, may significantly lower your tax liability. However, they are complex and will require the knowledge and insight of a qualified tax professional.
Many Japanese investors often find themselves being taxed just like US citizens with the proper tax planning. Tax rates range from 10% to 39.6%. These investors tend to pay at the lowest tax rate level (if they pay at all), since rental real estate generates depreciation deductions and often 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).
In addition to federal tax issues, Japanese investors will encounter various state tax issues. The US is composed of 50 states, 43 of which impose a state income tax. Some of these states may also have other taxes and specific filing requirements that will make the process more complex. These complexities at the state level can create obstacles to the process.
Navigating US tax law and filing the applicable tax returns can be a difficult process. You should engage with an experienced tax professional before making your first real estate investment. At Sundin & Fish, PLC, we work extensively with real estate investors from Japan and we can 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.