In the United States, tax laws treat foreign investment in bonds very differently than foreign investment in real estate. If you are a non-citizen considering investing in the U.S., consider how your choices of investment vehicles will affect taxes and estate planning.
Bonds Versus Real Estate
Many investors want to take advantage of the opportunities available in the United States. If you choose to invest in bonds here, you most likely will not owe income taxes or estate taxes as a result of owning them. The U.S. tax laws provide for an exemption for publicly traded bonds, and so they are not considered to have a U.S. “situs” or location for tax purposes.
In contrast, your estate may owe estate taxes if you invest in U.S. real estate as a foreign person. The United States assesses estate taxes on all U.S. situs real property owned by people who are not citizens or residents. In other words, if you purchase a condo, house, or commercial building that is physically located in the United States, your estate may owe taxes later.
People who are not citizens and not residents have only a $60,000 estate tax exemption. They can own up to $60,000 in U.S. situs property without subjecting their estates to taxes later. For the most part, U.S. real estate tends to have values exceeding $60,000, so your real estate investment is more likely to lead to an estate tax bill.
In addition, non-citizen non-residents who own U.S. real estate have to prepare annual U.S. income tax returns. The United States tax laws for foreign citizens are extremely complicated, and the result for many investors may be money owed to the IRS.
What If You Still Want to Invest in Real Estate?
Despite the potential tax consequences, many foreign investors still want to purchase U.S. real estate – whether to rent out, to live in, or to give to relatives. You may want to consider forming a holding company, such as a corporation or limited liability company. Some investors choose to use offshore or foreign business structures rather than incorporating in the United States. In some cases, this could affect whether the IRS assesses estate tax as to the real estate. Before you get started in U.S. investing, however, talk to your lawyer and accountant about the tax implications.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.