Applying for an IRS ruling on your international tax planning will save you taxes in the long run.
International tax strategies for investing in U.S. real estate is tricky.
Luckily for my readers, IRS international tax attorney, Barbara A. Felker, has written a letter (in some cases the IRS National Office will write letters to other government employees).
This letter discloses a new IRS secret attack on the foreign investor in real estate and the U.S. stock market. To protect oneself, the non-citizen should not own or lease a home in the U.S.
We found the letter and are providing it to our readers. I have added annotations explaining some of the foreign tax planning issues and the IRS attack.
This letter shows a new international tax trap that the IRS is developing. This letter is attacking two types of income. The blog discusses the sale of real estate. The IRS is trying to increase the tax rate from 20% to 30% with this new concept.
This letter is full of tax jargon. The concept is this. If a non-citizen has a “tax home” in the U.S., he is doomed.
A “tax home” is considered by the IRS to be his principal place of business or “post of duty.” Where the individual maintains his family home or abode is ignored. <1>
However, if the individual does not have a regular or main place of business because of the nature of his work, then the tax home is the place where he regularly lives, or the taxpayer is considered homeless for U.S. tax purposes.
Many people are homeless for U.S. taxes. Consider Hans. He s has a home in California, an apartment on the World Yacht, a home in Norway and a home in Singapore. He is retired. He has no tax home.
At the end of this blog, read what happens if the California home is a working ranch.
Release Date: 3/25/2016
Date: February 5, 2016
Refer Reply To: CC:INTL:B03: GENIN-122050-15
U.S. Taxation of Gains Realized by
Nonresident Alien Individuals
Dear * * *:
Gain on the sale of stock by nonresident alien individuals is not subject to tax by the United States, either under the Internal Revenue Code or under the terms of an income tax treaty to which the United States is a party.
However, some stock gains may be subject to U.S. tax under section 897 (treating gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest, including stock of a domestic corporation that is a United States real property holding corporation, as gain or loss effectively connected with a trade or business within the United States). (Author note: all stock gains are taxable if the corporation’s primary asset is real estate in the U.S.).
Also, nonresident alien individuals may be subject to U.S. tax on stock gains in certain unusual factual situations described below. (Author note: this part is important).
Under section 865(a) of the Code, a United States resident’s gain from the sale of personal property (author note: real estate is not personal property) is U.S. source income, unless an exception applies.
For these purposes, a United States resident means a U.S. citizen or resident alien who does not have a tax home in a foreign country or a nonresident alien who has a tax home in the United States. Section 865(g)(1)(A)(i)(II).
Certain individuals who would otherwise be resident aliens under the substantial presence test of section 7701(b)(3) and Treas. Reg. § 301.7701(b)-1(c) may be treated as nonresident aliens if the individuals are “exempt individuals” whose days of presence are not counted for purposes of the test under section 7701(b)(5) and Treas. Reg. § 301.7701(b)-3. (Author note: This is important tax planning).
Such an individual may nevertheless be a United States resident for purposes of section 865(g)(1)(A)(i)(II) if the individual’s “tax home” is in the United States (author note: the tax planning is a double negative. If you need, help contact me. This means that the individual is a non-resident except for the taxation on the sale of stocks and bonds and real estate).
“Tax home” for this purpose is defined in section 911(d)(3) and Treas. Reg. § 1.911-2(b) as the individual’s regular or principal place of business, or his or her place of abode if he or she has no regular or principal place of business.
A “foreign government-related individual” is an “exempt individual” whose days of physical presence are not counted under Treas. Reg. § 301.7701(b)-3(b) in determining residency would have a tax home in the United States because his or her regular or principal place of business or place of abode is in the United States.
Similarly, exempt individuals who are teachers, trainees, and students or foreign professional athletes may have a tax home in the United States and be treated as U.S. residents for purposes of section 865(a), even though their days of presence are not counted for purposes of the substantial presence residency test. Seehttps://www.irs.gov/Individuals/International-Taxpayers/Nonresident-Alien-Students-and-the-Tax-Home-Concept.
The source of a nonresident alien individual’s gain from personal property sales (including sales of stock of any company, irrespective of whether that company is a U.S. or non-U.S. resident company) would be the United States under the general rule of section 865(a) if the individual’s tax home is in the United States (author note: here is the tax trap).
Similarly, Treas. Reg. § 1.865-2(a)(1) provides that a loss recognized on stock is allocated to the class of gross income on which gain from the sale of such stock would give rise in the hands of the seller.
Those nonresident alien individuals who both have a tax home in the United States and are present in the United States for 183 days or more are taxable on the excess of U.S.-source capital gain over a U.S.-source capital loss at a rate of 30 percent under section 871(a)(2). (Author note: I do not think this is correct They are taxed the same as a U.S. citizen. Capital gains are taxed at 20%),
However, that tax is not subject to withholding under section 1441, see Treas. Reg. § 1.1441-2(b)(2)(i). As noted above, such gains may be exempt from tax under the provisions of an applicable income tax treaty (author note: for example the United Kingdom – U.S. tax treaty; learn more on this link).
This information letter calls attention to certain general principles of the law. It is intended for informational purposes only and does not constitute a ruling. See Rev. Proc. 2016-1, § 2.04, 2016-1 I.R.B. 1 (Jan. 4, 2016).
If you have any additional questions, please contact * * * at * * *.
Barbara A. Felker
Branch Chief, Branch 3, Office of Associate Chief Counsel (International)
Back to Hans. The man with the apartment on the World Yacht. His home is California includes an avocado orchard.
He has ranch hands on the property. He sales commercially sales the avocado. The home is his business tax home despite the fact that his primary home in Norway.
His retirement portfolio includes U.S. publically traded stocks. Since the Great Depression, Congress has encouraged foreign investment into U.S. businesses. The sale of stocks has been tax-free and still is tax-free. But not for my client under this new IRS tax attack.
Since he has a business home, he is taxable on the sale of personal property. Stocks are a type of intangible personal property.
Thus, the IRS will want to tax him at 30% despite more than eighty years of Congressional intent.
Your Author’s Footnotes
<1> IRS Revenue . Ruling . 75-432, 1975-2 C.B. 60; Revenue Ruling. 60-189, 1960-1 C.B.
60, amplified by IRS Revenue . Ruling 83-82, 1983-1 C.B. 45.