Tag Archives: sale of U.S. real estate

Tax Savings with International Tax Treaty Planning for the Resident Alien

Citizens of Canada, the U.K., Australia, New Zealand, the European Community, have a unique tax advantage while living in the U.S.  Tax treaties with these countries provide a unique and little-known tax savings. 

This video is an audio clip from my tax radio show, Tax Talk. You will learn why resident aliens are paying more in taxes than they should. 

If you have any questions, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 or visit our website – https://www.intltaxcounselors.com.  

International tax planning starts with these essential concepts:
Resident Aliens

resident alien’s income is taxed in the same manner as a U.S. citizen.

They pay tax on their worldwide income including income from interest, dividends, wages, other compensation for services, rental property, and royalties.  The resident alien must report these amounts whether from sources within or outside the United States.  Depositing of income outside the U.S. is taxable.

If you are a citizen of a country with a tax treaty, the treaty decides if you are a resident or non-resident.  Otherwise, if you have a green card or spend too many days in the U.S., you are a resident alien.

Nonresident Aliens  

Nonresident aliens are usually subject to U.S. income tax on U.S. source income.  In some cases, foreign source business income can be subject to U.S. tax.  You will learn more in my book, International Taxation in America for the Entrepreneur.

Dual-Status Aliens  

dual-status alien is an individual that is both a resident alien and a nonresident alien in the same tax year.  This can occur when you obtain your green card.

Income Types

U.S. Investment income is taxed at a flat 30% of the gross income.  If the non-resident alien resides in a treaty country, the tax rate is usually between zero and 15%.

Business income is taxed on a net income basis.  The alien has the same tax rates as an American.  In some cases, an NRA’s foreign business income is taxed by the U.S.  This occurs when the NRA has an office or some other type of business facility or is in the U.S. on a business trip.

Tax Withholding on Foreign Persons

Payments of U.S. income to foreign persons are subject to the  withholding tax rules.  In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income.  This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.

The NRA that comes to the U.S. for business meetings owes U.S. tax on his foreign salary if he or she is paid more than $3,000 by his employer.

Taxpayer Identification Numbers (TIN) for the non-citizen

Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN).  Also, non-citizens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.

Sale of Real Estate 

Non-Resident Aliens are hit with a fifteen percent withholding tax on the sale of U.S. real estate.  In some cases, the withholding tax applies to refinancing.  The withholding tax does not replace the income tax.  Aliens must file an income tax return.  The tax withheld is a credit towards the total tax.  If the total tax exceeds the tax withheld, they get a refund.

Saving Taxes with Tax Treaties 

The U.S. tax liability of non-resident aliens is determined primarily by the provisions of tax treaties.  If the non-citizen is not a national of a treaty country, then the U.S. Internal Revenue Code applies.

Many foreign countries have tax treaties with the U.S. Tax treaties override or modify the provisions of the Internal Revenue Code.  Tax treaties allow you to pay less tax.

Estate Taxes

All though you are a resident alien for income taxes you may be a non-domiciled alien for estate (death) taxes.    Non-domiciled aliens are subject to estate taxes on all of their U.S. property (including stocks, bonds, and property) except bank accounts and life insurance.  They are not entitled to the $5,000,000+ exemption that is allowed for Americans.  Accounts with brokerage firms are frozen upon the alien’s death.   Tax treaties may allow the alien to avoid U.S. gift and estate taxes.

Become an Expert

Become an expert with my book, International Taxation in America for the  Entrepreneur, available on this link and feel free to call me with any questions that you have.

 

 

Quick Refund of the FIRPTA Withholding Tax with Form 8288, Form 1120F and Form 1040NR for the Foreign Investor in U.S. Real Estate

You are about to sell your U.S. real estate and have learned about the 15% Firpta (foreign investor real property tax act) withholding tax.  You want to avoid the tax with Form 8288, but the IRS will not process your request by the time you close escrow (learn how to get a faster IRS response to Form 8288 on this link).

Here is how to get a fast refund of the FIRPTA Withholding Tax

The best method to get a quick refund is to file a “fiscal year” tax return claiming the refund.  Assume that your U.S. real estate is owned by a foreign corporation.   The corporation owns property that you have used as a personal home.   Assume that the sale is completed on September 15th.  If the corporation elects a “fiscal year end” of September 30th,  it can file an IRS Form 1120F (the U.S. tax return for a foreign corporation) on October 1st with a claim of refund of the tax.

For example, you have a British Virgin Islands company that owns a home in the United States.  The home cost $500,000.  It is being sold for $600,000.  Your cost of sale (commissions and fees) is $40,000.  Your taxable gain is $60,000 ($600,000 – $40,000 – $500,000).  Your U.S. income tax is $10,000.  The FIRPTA withholding is $90,000.

You file IRS Form 1120F and claim a refund of $80,000 ($90,000 withheld less the income tax of $10,000).  

A word of caution.  You must file a “complete and accurate” tax return.  This requires you to attach all of the supporting evidence of the cost of the home, the real estate commission, fees, and the Firpta withholding certificate showing the tax withheld.

One last concern is the “Branch Profits Tax”  U.S. tax law has a second corporate tax called the branch profits tax.   International tax planners use various strategies to avoid this tax.  Here is a link to our blog post on one such strategy.

If you would like to hire our firm to prepare the refund claim of the FIRPTA tax, then email me, Brian Dooley, CPA, MBT) at [email protected]   Our fees start as low as $5,000 for the Form 1120F.