As we all know, the United States tax system is complicated. This article is trying to help foreigners understand American real estate tax and  answer general questions frequently appeared during house purchases, rentals and sales.

House purchase

Buyers do not pay income tax when buying a house. Ownership transfer tax including STAMP, etc., can be added as the cost of house purchasing.

House rental

The US Income Tax Act requires that housing rental should be included in the owner’s income tax return. The net income from housing rental should be included in taxable income and taxed according to the law.

For average Foreign investors, they only need to pay taxes in the United States for income from the United States because they do not meet the conditions of U.S. tax residents. In other words, Foreign real estate investors only need to declare the rental income and related costs of US real estate. 

It is a frequently asked question that if  a house rental received $20, 000 rent, should tax be paid based upon this $20, 000? Answer is NO, because income tax is calculated not on the basis of gross income, but on net income after deducting relevant expenses. Housing rental costs generally include:

property tax

Loan interest

Insurance

management fee

Repair and maintenance costs

Homeowners and rental housing related travel expenses

Depreciation (residential depreciation period: 27.5 years, commercial depreciation period: 39 years)

Regarding depreciation, the IRS has allowed via allowable rule. Allowed refers to actual deducted depreciation and Allowable means deductible depreciation. When selling a house, regardless of whether the seller has already deducted depreciation, the tax base of the house should be calculated according to the depreciation amount that should be deducted. In other words, even when the house is rented out and depreciation is not deducted, when selling houses, the tax base will still be reduced due to depreciation, thus increasing the seller’s capital gains.

House selling

According to the U.S. Tax Law,  when foreigners sell real estate, buyers should on seller’s behalf withhold and pay an income tax of 15% of the selling price, which is usually enforced by the lawyer of the transfer company. When the house selling price is less than one million US dollars, withholding tax rate of 10%. When the selling price is less than 300,000 US dollars, under certain conditions, buyers can avoid withholding and pay tax for sellers. If the homeowner can prove that he is a United States tax paying resident, he can also waive withholding tax. the seller can declare the house sale on the annual tax form, calculate the true capital gains and claim overpaid withholding tax from the IRS. For more details and tax planning on housing sale withholding tax, you can consult with us in person.

Our Suggestion

Foreign homeowners should declare their  house rental and timely deduct the depreciation expenses in accordance with the tax law each year, which will meet the compliance requirements without obviously increasing the tax cost. When selling the house, it will avoid compliance risk caused by hiding house rental behavior.