Are there any restrictions on non-residents when purchasing property in US?
In general there are no restrictions placed on people from outside the U.S. buying
Which are the additional purchase costs in the US?
• Title insurance – this is a contractual obligation that protects against losses that occur when title to a property is not free and clear of defects (e.g. liens, encumbrances and defects that were unknown when the title policy was issued). The terms of the policy define what risks are covered and what risks are excluded from coverage. The title insurer will reimburse you for losses that are covered, up to the face amount of the policy, and any related legal expenses. This protection is effective as of the issue date of the policy and covers defects arising prior to your ownership. Title companies issue policies on all types of real and personal property.
• Broker commissions – real estate transactions that involve a broker are usually subject to a commission that typically varies between 3% and 6% of the property purchase price; however, oftentimes the commission is born by the seller.
Shall I be treated as non-resident alien or resident alien?
Non-residents in the US are classified as non-resident aliens and resident aliens. If someone is an alien (not a US citizen), he is considered a non-resident alien unless he/she meets one of the two tests:
• Green card test - A person is a resident for tax purposes if he is a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card” test.
• Substantial presence test – A person will be considered a US resident for tax purposes if he meets the substantial presence test for the calendar year. To meet this test, he must be physically present in the United States on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that.
As a non-resident individual who owns a property in the US, do I need to file a US tax return?
Generally as an owner of a US real estate property you do not need to file a tax return. A tax return is required only for the year when you sell or otherwise dispose of your US property. The tax implications of receiving rental income are explained next.
How are resident aliens and non-resident aliens taxed on income derived from US situated property?
Resident aliens generally are taxed on their worldwide income, the same as US citizens. They need to file an annual return and report the rental income received. Rental expenses are permitted to offset rental income, and the net rental income is taxed at graduated rates.
Non-residents receiving rental income from US situated real property are generally taxed at 30% of the gross rental income. It is the tenant or the real estate management company (if there is one involved) that has a primary obligation to withhold the 30% tax before remitting the net amount to the non-resident landlord. A non-resident alien receiving rental income is not required to file an annual income tax return to report the rental income as the 30% tax withheld satisfies the US tax liability. However, the US tax law permits a non-resident alien to make a special election as explained in the following section.
Special election under IRC Section 871(d) to file an annual return:
In order to mitigate the 30% gross income withholding tax, the non-resident landlord is allowed to make an election under IRC Section 871(d) that relieves the income payor from the obligation to withhold 30% tax on gross income and at the same time allows the non-resident to file an annual return and tax the rental income on a net basis (net of expenses). This election is made by attaching a formal election statement to a timely filed tax return Form 1040NR.
What are the US income tax rates?
For those who elect to tax rental income on a net basis, the US income tax rates vary and are applied on a sliding scale from 10% to 39.5%. State tax may be required in addition to the federal rate depending of the rules imposed by the state where the property is located.
What can I deduct as expenses against my US rental income?
If you do make an election under Section 871(d) and elect to tax your rental income on a net basis as explained above, there are a number of allowable expenses which can be offset against your rental income.
• Pre-rental expenses
• Travel expenses
• Cleaning and Maintenance
• Tax return preparation fees
When do I need to file my US tax return?
The deadline for filing a US income tax return is April 15th. There is an automatic extension given to non-resident aliens who have until the 15th of June to file their US income tax return.
Am I obliged to apply for US tax number if I am treated as non-resident alien?
Non-resident aliens shall apply for an Individual Taxpayer Identification Number (ITIN). An ITIN is a tax processing number, issued by the Internal Revenue Service (IRS). It is a nine-digit number beginning with the number “9”, has a range of numbers from “70” to “88” for the fourth and fifth digits and is formatted like a Social Security Number (SSN) (i.e. 9XX-7XXXXX). The ITIN is only available to individuals who are required to have a taxpayer identification number for tax purposes but who do not have, and are not eligible to obtain a social security number from the Social Security Administration (SSA). Practically, a non-resident alien may obtain an ITIN only if they receive or expect to receive taxable income from US sources.
What else do I need to consider if I expect to receive rental income and I want to elect to tax this income net of expenses?
In addition to obtaining an ITIN and making a formal election under IRC Section 871(d), you also need to provide your tenant or property manager with a fully completed and signed form W8-ECI. This form is required in order to relieve your tenant or property manager from the obligation to withhold 30% of the gross rental income remitted to you.