Non-resident aliens (NRAs) often invest in New York real estate thanks to the market’s history of consistent growth. At Elika Real Estate, we frequently act as buyer’s agents for foreign buyers and help our clients organize their goals, evaluate properties and choose ownership alternatives to maximize the value of their new properties. There are several ways that non-resident aliens can acquire U.S. real estate. However, to control costs and personal information disclosures, NRAs can consider several ownership options.
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The Advantages of Direct Ownership
If you are a non-resident alien, directly owning a property has several distinct benefits and two significant disadvantages.
- No Second Tax Levels for Rental Income – NRA’s pay the second level of taxes on their repatriated operating earnings, which includes rental income, through some of the other ownership options listed below. By directly owning properties, NRAs avoid this consequence. The United States also does not tax imputed rental income for individual direct owners. Imputed income is an essential concept in non-resident alien ownership, and we will discuss it further when addressing other purchasing options.
- Capital Gains Tax Advantages – Non-resident aliens typically have more favorable capital gains tax rates upon selling their properties through direct ownership than they might get through other options. The two primary disadvantages of direct ownership for non-resident aliens:
- Income Tax Returns – NRAs need to file personal tax returns with the United States Internal Revenue Service (IRS). These returns require non-resident aliens’ personal information, and some people prefer to avoid income tax filings because they do not want to disclose their identities to the IRS. There are instances in which an NRA would not immediately file income taxes, but all direct owners need to file income tax statements when selling their properties.
- Estate Taxes – The United States estate tax applies to properties owned by non-resident aliens, which can be a significant consideration for some buyers. These disadvantages compel many buyers to consider other options, such as owning property through corporations and limited liability corporations.
Advantages of Buying Through U.S. and Foreign Corporations
Many buyers choose to purchase a property through a U.S.-based or foreign corporation. Owning a New York City property through a U.S. corporation offers the following advantages and disadvantages:
- Non-resident aliens get liability protection by holding real estate through a United States-based corporation. You pay a 35 percent federal income tax rate for operating the corporation.
- The corporation needs to list the address, taxpayer identification number and the name of any person who owns more than 50 percent of the corporation’s stock to the IRS.
- However, the corporation owner does not need to file personal income tax statements.
- Repatriated funds (any money sent back to your home country) are subject to double taxation unless you decide to end the corporation and liquidate its holdings.
- As with direct ownership, you are subject to estate taxes when you own property as a United States corporation.
You can also form a corporation in another country to own U.S. real estate, but the Foreign Investment in Real Property Tax Act (FIRPTA) comes into play. Here’s what you need to know about this option
- You pay a 35 percent federal income tax for operating a foreign corporation inside of the United States.
- Any repatriated operating income on your real estate is subject to an additional tax of 30 percent. This applies to all of your holdings.
- FIRPTA taxes don’t apply to stock sales, but they do apply to the real property interest.
- You do not pay estate taxes or gift taxes on real estate owned by a foreign corporation.
Speak with a qualified tax accountant who has experience with foreign corporations for more information on tax advantages and disadvantages as they relate to your case.
Advantages of Buying Through Limited Liability Companies (LLC)
Some non-resident aliens create a limited liability corporation (LLC) to get some of the benefits of buying a property through a corporation along with the flexibility of direct ownership. Limited liability corporations get their name from the way that the U.S. government assigns a limited tax liability to the owner or owners of the LLC.
Here’s what you need to know about purchasing a property through an LLC:
- You can form an LLC alone or with partners to purchase a property. If you are the sole owner, United States tax law treats you as a disregarded entity. This means that for tax purposes, you are not a separate body from your LLC.
- A limited liability corporation serves as a partnership when it has multiple owners.
- Many countries do not have a limited liability corporation designation or assess more of tax liability for people with LLCs. Your home country’s tax laws will play an important role in determining whether ownership through an LLC is worthwhile.
If you do not want to file personal income taxes and your home country assigns a similar tax status to LLCs as the United States, this is indeed an option to consider.
Tiered Structures: Asset Protection and No Personal Income Tax Requirements
In a layered structure, you own a United States corporation through a foreign corporation or trust. Tiered structures are an especially popular option for the following reasons:
- There is no personal tax return requirement.
- You pay withholding taxes on declared dividends and distributions, but not on deemed repatriations.
- When you sell your real estate, the cash from the sale can be repatriated to your foreign corporation. You do not pay taxes to the Internal Revenue Service, although your home country’s taxes still apply.
- You pay no estate taxes or gift taxes.
You should work with experienced tax professionals to understand the full advantages and disadvantages of every option.
Understanding Your Options
Before choosing a property ownership method, consider your goals. Ask yourself the following questions:
- Am I willing to file a personal income tax return?
- How does my home country tax LLCs and corporations?
- Am I buying property for an investment or personal use?
- Am I working with individuals who fully understand my goals and my non-resident alien status?
By working with the experienced buyer’s agents at Elika Real Estate, you can meet your real estate goals by purchasing excellent investment properties or a private home ideally suited to your lifestyle. We frequently work with non-resident aliens and can recommend a variety of resources to help you take the first steps towards property ownership in New York City, including accountancy and legal professionals.
The information below does not constitute legal advice, tax advice or an official position from Elika Associates. We do not provide any guarantee or warranty that the information below is correct. If you are seeking professional guidance for a real estate purchase, contact the broker’s agents at Elika Real Estate to schedule a consultation. Consult a tax professional for qualified income tax advice.