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  • Gonzalo Daniel Bauza

U.S. Tax Planning for the Foreign Real Estate Investor

There are all sorts of reasons to invest in real estate in the United States.

Tax anxiety is not one of them.

Fortunately, you can take steps to prepare for the dreaded Tax Day—if you know what you’re doing. Here’s a quick and easy guide to tax planning for the foreign investor in U.S. real estate, including a few basic concepts you need to understand.


How Are You Taxed?

First, let’s address the most basic question: how will you be taxed?

The United States taxes all citizens, residents and domestic corporations on income regardless of where it is earned. In other words, if you have any tax ties to the United States, you will be taxed in the U.S., even if you haven’t spent any time in the country when you earned that money.

If you’re not a U.S. citizen, resident, or domestic corporation, taxation will depend on your status.

Most likely, you’ll be taxed as an international investor (an individual without citizenship or residency in the U.S.). You will only be taxed on income that originates from a U.S. source or is effectively connected to U.S. trade or business (if you own an investment property and collect rental income, that counts).


Effectively vs. Non-Effectively Connected Income

What does it mean to have effectively connected income?

Effectively connected income generally refers to all income generated from business or trade conducted within United States borders. This applies whether or not there is any connection between the income and the business being conducted. There is a minimum threshold that must be met, and you can take deductions against it based on the tax treaties between the U.S. and your country.

Non-effectively connected income includes any of the following, unless they come from an asset or are produced by a U.S. business or trade:

Interest income

Dividend income

Rent (you can elect to treat real property income as effectively connected)

Royalties

Sale of personal property

In generally, it’s wise to speak with a U.S. tax professional in order to prepare for the tax season.


Net Basis Elections

Let’s say your income is non-effectively connected. There are ways to change that.

The IRS allows international investors to elect to be taxed on a net basis at graduated rates as though the income were effectively connected. This is an attractive option for many investors, as you’re relieved of 30% of the tax on gross rents and are allowed to deduct expenses related to that real estate.

This applies to all U.S. real estate held at the time of election.


Are You Looking to Invest in U.S. Real Estate?

Are you ready to take on U.S. taxes and invest in U.S. real estate?

If so, we’re here to help.

We connect investors with solid real estate investment options in the U.S., including commercial property, apartment buildings, and groups of houses.

If you’re looking for somewhere to start, check out this guide to investing in commercial real estate. Or, if you’re ready to take the plunge, get in touch with us today to see how we can help your money grow.

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