9 things Europeans with property in the US need to know about tax
It’s hard enough to come to terms with tax in your own country without having to understand the tax rules and regulations in the USA as well.
But if you own a property in the US, it is very important that you have a strong grasp of your tax obligations and entitlements.
Ultimately, this will help you to make the most of your investment.
The challenge is that foreign property owners often face a more complex tax situation.
What’s more, it’s crucial to stay on the taxman’s good side so that you can avoid fines and penalties.
In this guide, we are going to outline everything Europeans need to know about tax if they own a property in the USA.
- In this article:
- What are the tax implications of owning a property in the USA?
- Who can help?
What are the tax implications of owning a property in the USA?
1. The annual tax returns
Nonresidents who are US property owners need to file an annual federal tax return (Form 1040NR)
The deadline to file is typically 15 April each year and nonresidents must obtain a US Taxpayer Identification Number (TIN) before filing.
Aside from your federal return, you may also have a state filing requirement, depending on the state in which you own your property.
2. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
FIRPTA is a tax imposed on nonresidents who sell property in the US.
In such transactions, the foreign person (the buyer) is responsible to withhold 15% of the sale proceeds and submit this amount to the IRS. This is not an additional tax, it is simply a withholding. This is required so that the government can ensure that the tax liability for the property is paid. Afterwards, the amount is refunded once the taxes on the property are up-to-date.
Fortunately, with good business structuring, foreign investors are able to avoid FIRPTA real estate tax which will help them to reduce their overall tax burden. If a foreign property owner obtains a Withholding Certificate, he/ she may reduce FIRPTA withholding at the time of sale.
3. Tax rates
The Internal Revenue Service (IRS) requires all foreigners to pay US income taxes on any income from US sources. Unless reduced by an applicable tax treaty, rental income is subject to a flat 30% withholding tax.
4. You can choose how your property income is treated
As a nonresident US property owner, you can choose to treat all income from this real estate as income connected with a business or trade in the US. Depending on the choice that you make, there may be a number of tax deductions that you can claim in order to reduce your overall tax bill.
5. Elections to make
The income of a non-resident alien, that is subject to US income tax, can be divided into two categories:
- income which is effectively connected with a business or trade in the US
- income which is not effectively connected with a business or trade in the US
Effectively connected income is taxed at graduated rates with deductions allowed whereas income which is not effectively connected with a trade or business is taxed at a flat 30% rate.
To mitigate the 30% gross income withholding tax, non-resident landlords are able to make an election that relieves the income payer from the obligation to withhold the flat 30% tax on gross income and allows the non-resident landlord to file an annual return and tax the rental income (net of expenses).
You can make this election by attaching a formal election statement to your Form 1040NR tax return.
Whether or not you elect to determine your income as connected with a business or trade in the US, can make a big difference to your tax liability.
For instance, if the gross income from a rental property is $100,000 (without the election), the income tax would be $30,000 (30% of $100,000). With the election, some deductions like mortgage interest and property tax, etc. would reduce the taxable income and the tax payable would be 30% of the net amount.
6. What is a tax treaty?
The US has tax treaties with 66 countries. These treaties allow foreigners to pay less tax or be exempted from taxes on certain items.
If you are entitled to tax treaty benefits, you may be able to reduce your tax bill. Exactly how much you can claim will depend on the agreement the US has signed with your country.
7. Gains impact the taxation
When a nonresident in the US sells real estate, any gain is taxed as if the property had been sold by a US resident or citizen. Therefore the gain may qualify for lower long-term capital gains treatment if the property has been held for more than 12 months.
8. Withholding tax
You will be subject to a 15% non-resident withholding tax on the gross sales proceeds of the transaction – unless you are exempt from the withholding.
To get a certificate of exemption (Form 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests) a petition for exemption would need to be filed with the IRS in advance of the sale date.
9. Tax on rental income
If you’re earning income from your US rental investment, you will be liable to pay tax on it in the US. PTI can help you manage your tax liabilities correctly, and to ensure you’re not taxed on this income more than once.
Owning real estate is a great way to generate consistent passive income, but preparing your personal or business property tax returns can be very perplexing. As a landlord, you can take advantage of several tax deductions.
The key is to be organized throughout the year, so you can take advantage of every deduction you are entitled to receive. Keep in mind that, if you are audited, the IRS will want to see evidence for every deduction that you take.
Who can help?
At Property Tax International (PTI) our team of tax experts specialize in property tax returns for overseas property investors.
PTI will keep you updated throughout the process and communicate directly with the American tax office on your behalf.
- We offer a comprehensive US property tax return service
- Our team of tax experts can answer any of your US property tax-related questions.
- We filed over 322,000 tax returns last year.