In this vlog, we will talk about rental property taxes in the USA for foreign nationals. Understand the regulations, exemptions, and obligations.
USA Rental Property Taxes For Foreign Nationals
If you are a foreign real estate investor, you should know the amount of taxes your rental properties are going to pay and if you have tax structure options ...
Real estate investing can be a lucrative venture in the United States for foreign nationals. However, it’s essential to understand how the US tax system works to maximize your profits and minimize your tax obligations.
The United States is a popular real estate investment market for foreigners. When investing in real estate, one should know how much tax they will pay from rental income and the tax structure options available. It is advisable to buy real estate under an LLC, which offers legal protection of personal assets in case of lawsuits against the rental property.
A non-resident foreign investor must file the 1040 NR form, which is the personal tax return for non-residents, and the Schedule E form, which goes inside the 1040 NR. The Schedule E form reports rental income and expenses.
Under the US tax system, if a foreign investor buys rental property under their name, they must report rental income on the Schedule E form and report net profit as income on their personal tax return. The tax system treats the rental property as personal property, which means that the foreign investor’s personal assets are at risk in case of a lawsuit against the rental property.
In contrast, buying rental property under an LLC offers legal protection for personal assets. If a lawsuit is filed against the rental property, the LLC bears the risk, and the investor’s personal assets remain protected.
While buying under an LLC may not offer immediate tax advantages, it may save on taxes when the net profit at the end of the year is high. The video advises foreign investors to consult with experts to determine the best tax strategy to minimize tax obligations.
The US tax system is crucial for foreign real estate investors to maximize profits and minimize tax obligations. It is important to buy rental property under an LLC for legal protection of personal assets and to know how to report rental income and expenses to minimize tax obligations.
If you are a foreign real estate investor, you should know the amount of taxes your rental properties are going to pay and if you have tax structure options for your real estate investments as a foreign national. In this video we show you why it’s better to make your real estate investments under an LLC, the amount of taxes your real estate investments are going to pay, and real examples of real estate rental income tax strategies.
DISCLAIMER This video is intended for educational purposes and should not be taken as legal, financial, or tax advice. You should consult with a professional about your unique situation before acting on anything discussed in these videos. Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but we cannot give blanket advice to a broad audience. Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., Freedom Immigration International Inc., or its members cannot be held liable for any use or misuse of this content.
Understanding The USA Rental Property Taxes for Foreign Nationals
You are a foreign real estate investor and are planning on buying real estate in the United States, then you should know how the tax system works. You should know how much taxes you’re going to pay from your rental income and what tax structure options you have. That’s what we’re going to talk about in this video. Hello from Freedom Tax Accounting, we’re an accounting firm where we have been providing quality tax and accounting services now for over 20 years. If you are new to this channel, we provide strategies for small business owners so they can achieve their financial goals. So if that is a topic that you like, please subscribe to our channel.
Now, the US is one of the main real estate investor markets, especially for foreigners. A lot of foreigners invest in real estate in the United States. And when we offer consultations to these foreign investors, the questions always is, how much taxes are we going to pay? And what is the best business tax structure so I pay the less taxes as possible from my real estate rental income. So in this video, we’re going to go in depth. So it’s going to be maybe a longer video, but we are going to show you in detail how the tax system works for real estate rental income in the United States.
So let’s go into the content. So basically, we’re going to talk about the USA rental property taxes for foreign nationals. What are we going to talk about in this? Basically, this is like a seminar. So we’re going to talk about is it better to buy real estate under your name or buy it under an LLC? And we’re going to show you why it’s better to buy under an LLC and not under your personal name. We’re going to talk about the tax rates that you’re going to pay from your rental income. We’re going to talk about tax deductions. Once you have your rental income, what can you deduct as operational expenses to lower your annual net profit so you pay less taxes? And speaking about deductions, we’re going to talk about how do you calculate depreciation on your property so you can include it into those deductions. And we’re also going to give examples. We’re going to give three or four real life examples with numbers so that you can see each strategy with actual numbers. Now, the first question that we always get with foreign real estate investors is, is it better to buy the rental property under my name or under a business, especially an LLC?
I would say that 99 % of the time it is better to buy under an LLC. I would say 100 % of the time, but nothing’s absolute. Every case is different. But for the last 20 years that I’ve been doing this here at FreedomTax Accounting, I haven’t seen one case that is not a good idea to buy under an LLC. Now, at the beginning, there’s basically no different in the amount of taxes you’re going to pay if you buy under your name or if you buy under the LLC. So you don’t buy under the LLC to save in taxes. Now, if your net profit at the end of the year is very high, then the LLC may give you a tax advantage, which we’re going to show you later on in this video. But the main purpose that you buy real estate under the LLC is for legal protection of your personal assets. Why? If you buy a rental property under your name, God forbid there is an accident in that property. There’s going to be a lawsuit against you. And it doesn’t matter how much insurance you have, your personal assets are going to be at risk.
If you buy the rental property under the LLC name, it’s going to be if there is a lawsuit, it’s against the LLC and not against you as a person. So your personal assets are protected. Now, before we move forward, we must know these two terms because I’m going to give examples and you must know what these terms mean. The first one is 1040 NR. What is the 1040 NR? 1040 NR is the personal tax return for non residents. When we, US citizens or residents, file a personal tax return, we file Form 1040. For non residents is the 1040 NR. Now, the second term is the Schedule E. The Schedule E is a form that goes inside the 1040 NR. That’s the form where you report your rental income and expenses. So 1040 NR is the personal tax return for non residents. Schedule E, a form inside the 1040 NR where you report your rental income and expenses. This is how they look like. This is the 1040 NR and this is the Schedule E that goes inside the 1040 NR. Here you list your properties and here you put the rental income and expenses. Now, how does the tax system work if you buy under your name?
Let’s discuss how the tax system works under your name if you buy under your name. If you buy under your name, under your name, so you see that there’s really not any difference initially if you buy under your name or under the LLC. So how does the rental income taxes work? Okay. So your rental income, you have sales. That is your rental income and you report it in the Schedule E. Then during the year, you have your deductions or operational expenses. At the end of the year, you have your net profit. That net profit gets reported on the personal tax return as income. And if you’re a foreigner, in order to file your 1040 in our form and you don’t have a Social Security Number, then you need to apply for an ITIN number. An ITIN number is an Individual Taxpayer Identification Number. It’s a tax ID number for foreign nationals that have to file taxes in the United States. Nothing to do with immigration, just for tax purposes. So this net profit gets reported as income under personal tax return and you pay a federal tax of 10 % to 37 %. If you are in a state or your rental property is in a state that has state income tax, then you need to add the state income tax for that.
But there are many states that don’t have the state income tax, so you don’t have to worry about it. So the federal tax is 10 % to 37 %. Now, how do you determine the tax rate? You need to look, and this is your only option. If you file under your name, if you buy under your name, this is your only tax option. It doesn’t matter how much net profit, it doesn’t matter how much value. You’re always going to have to file like this. Under the LC, you may have flexibility and can file different ways. And I’m going to show you later on. So the net profit reports as income face this amount in taxes. How? This is the personal tax rate for 2023. These tax brackets change a little bit every year. This is the tax bracket for 2023. And as you can see, if your net profit, not total amount of income, if your net profit is up to 11,000, that pays 10 % tax rate. Then up to 44,723, you pay 12 % income. Now, what happens if you have $15,000? $15,000 as net profit. So that’s here, right? Well, you don’t pay 12 % out of the complete 15,000.
The first 11,000 pay 10 %, and then from 11,001 to 15,000 pays 12 %. Okay? So that’s how you determine your tax rate. And if you’re paying over 21 % on your rental income, then you need to change your tax structure. And we’re going to show you how later on. So let’s look at an example. Let’s say you have a property with a value of $300,000, and you make $2,500 a month of rental income. So $2,500 of rental income a month, that’s $30,000 of rental income in the year. Now, these are your tax deductions. Whatever you pay your property manager, maintenance and repairs, your homeowners association, insurance, property taxes that you pay at the county level, professional fees. If you pay a lawyer, if you pay an attorney, if you pay a CPA, if you pay an accountant, that’s professional fees, license and permits. Now, you can also deduct mortgage interest. Now, if your rental property has a mortgage, your monthly mortgage pay payments. That cannot be deducted as an operational expense, but the mortgage interest can. If you’re paying utilities, that as well. Travel. Now, what does travel mean? Well, if you have a rental property in the United States, that means that you have a business.
So if you travel to the US to look at new properties, to check on your property, to come talk to your accountant, to come talk to your realtor, to come to the US and take a real estate seminar, that now is a business trip. So your hotel, car rental, meals, while you’re in the US for that business trip, that is an operational expense. And you can also deduct depreciation, which I am going to show you how you calculate this number. So 30 grand, rental income, all these deductions, we have 8346 as my annual net profit. So the $8,346, we look at the table, it’s here. So I pay 10 % tax rate. So 10 % of this is $834.60. That’s how you calculate your taxes for rental income. Now, how do you calculate depreciation? There are many formulas. This is the most general. Let’s say that you have a single family home. You need to calculate 70 % of the property value. Why 70 %? Because usually 30 % is the land and the land you don’t depreciate. You depreciate the actual structure. Now, this formula is for single family homes. If you own a condo, a building that has several floors, then the formula is different because there’s little land and a lot of structure.
70 % of the property we said in the example earlier that the home value was $350,000, 70 % of that is $245,000. Then you take the 30 % of the value, you divide by 330 months, that gives you 742. So 742, you multiply by 12 months, and this is your annual depreciation that you can deduct as an expense. All right? So basically, this is the general formula for depreciation, but there are other formulas you can use depending on your case. Okay? Now, we talked about paying taxes if you buy under your name, what happens if you buy under a single member LLC, meaning that the LLC has one owner, yourself? Then the tax structure is the same as if you were buying under your name. See how there’s no tax difference? So if you buy, if you form a single member LLC, the LLC files taxes on the same personal tax form. So you’re going to have a Schedule E under your LLC name, and the Schedule E is going to go inside your personal tax return. And it’s the same thing. You’re going to report your sales, you’re going to have your expenses, you’re going to have your net profit that flows into your personal tax return as income, and you pay the same amount in taxes from the same tax table.
So if you have a single member LC, you’re going to pay same amount in taxes as if you were buying under your name. So what happens if you have a multi member LC? Meaning that the LC has two or more owners. Then you need to file this form. This is the 1065 form because when LLCs have two or more owners, they are considered a partnership for tax purposes. So now you need to file a partnership tax return. And then inside the 1065 form, there’s going to be this form, the Form K1. There’s going to be one K1, one for each owner. This K1 is going to say this person, this owner has this amount of percentage of ownership in the LC, and this was the rental income that he should report. Now, the amount of income that each partner reports depends on the percentage of ownership of each owner of the LLC. Let’s look at the graph. This is how rental income taxes work for multi member LLCs. So your rental income is reported under the 1065 partnership tax return. You have your sales, you have your deductions, you have your net profit. And in this case, this partnership has two owners.
The net profit gets reported under one of the owner’s tax return based on his percentage of ownership. For example, let’s say this owner number one is 50 % owner and owner number two is 50 % owner. So 50 % of the net profit goes to this guy and the other 50 % of income, the other 50 % goes to this person of the net profit. And that percentage of income is subject to the same federal taxes. So it’s the same thing as before, but two separate or more than one personal tax return. So let’s look at an example. Same property, $350,000 property, $2,500 monthly rental income, annual rental income of 30 grand, expenses, annual net profit, $8,346. Now, this owner here is 70 % owner. So that means that 70 % of this goes to him. So the 70 % of the net profit is $5,842. This owner number two is only 30 % owner. 30 % of the net profit goes to him. At least he reports it. That doesn’t mean he’s taking the money. That means he’s reporting it on his personal tax return. So if we look at the tax tables, both owners are under 11,000.
So both of them pay a 10 % tax rate on the income that is reported under their personal tax return. Now, what happens if your net profit is super high? If you buy under your name, no tax option. If you buy under the LLC, there is an option for you to pay less taxes. Let’s look at the example. Let’s say you have a property or a group of properties that are worth $10 million and you have a monthly rental income of $100,000. That means that your annual rental income is $1.2 million. You have all your expenses and at the end of the year, you have an annual net profit of $706,000. Now, if we were to go to this table with $700,000, we are way over here. Now, that doesn’t mean that the $700,000, all of it is going to pay 37 %. Remember, up to 11,000 %, 10 %. And then each segment of the tax pick table pays these percentages. But for $706,000, that means a 31.25 % tax rate. That means that from this net profit, 31.25 % tax rate is $244,000. That’s a lot of taxes. How can we save on taxes in this scenario?
We need to take advantage of the LLC tax structure flexibility. When you open up an LLC with one owner, you are automatically a sole propriet for tax purposes and you file Schedule E. If you are an LC with two or more members, you are automatically a partnership for taxes and you file 1065. But you can tell the IRS, I don’t want my LC to be a sole proprietorship, and I don’t want to be a partnership. I want my LC to pay taxes as a C Corporation. Now, that doesn’t mean that you’re changing your LC to a Corporation. You are legally an LC, but you’re going to be a Corporation for tax purposes. And you file this form, the 1120 form, which is a corporate tax return. Now, how do corporate taxes this work. You file Form 1120, you report your sales, you report your deductions, you have your net profit, and your net profit pays a flat corporate tax of 21 %. Now, this is this year. Corporate taxes may go up or down in the future, but right now it’s a 21 % flat corporate tax, and nothing goes to the personal. So you don’t have to do a personal tax return unless you take money from the business.
Okay? So remember, in this scenario, we were paying 31.25 % taxes. Now, same example, we pay 21 % tax rate, that’s $148,000. That’s too lot of money, but you’re paying $96,000 less. So what is the tax strategy? You buy under an LC and your goal, depending on your annual net profit, you should stay between these tax rates, 10 % to 12 %. Once your net profit is super high that you’re going over 21 %, then you change to a C Corporation so you don’t pay over 21 %. That’s the tax strategy. Okay? So thank you for watching this video. Remember that each case is different. We highly recommend that you have a consultation so a professional can evaluate your specific case and you have the best legal and tax structure for your rental income business. But thank you for watching this video. I hope you have received valuable information. If you have, please like this video and share it with other business owners that can take advantage of this information. Thank you so much for watching. God bless you. Bye bye.
How is rental income taxed for non-resident in USA?
Non-resident who do not reside in the United States but earn rental income from US real estate are generally subjected to a 30% withholding tax on the total amount of each rental payment. This tax is imposed by the Internal Revenue Service (IRS) and is applicable to all rental income obtained in the US, regardless of the property owner's place of residence. However, specific tax treaties between the US and other countries may offer reduced tax rates. Non-resident individuals who receive rental income from US real estate are obligated to file a US tax return to report their rental earnings and claim any eligible deductions or credits.
Do foreigners pay taxes on US property?
Non-resident foreigners who possess property in the United States are generally liable to pay US taxes on rental income as well as on the proceeds from selling US real estate. Income derived from US-based real estate owned by nonresident aliens is typically taxed at a rate of 30%, although this rate can be lower based on applicable tax treaties. Additionally, the Foreign Investment in Real Property Tax Act (FIRPTA) mandates a withholding tax of 15% on the sales price of US real estate interests when sold by foreign individuals. However, there are no restrictions on non-resident aliens owning US real estate in terms of income taxes.
Do I need to pay tax on rental income in USA?
Certainly, rental income earned in the United States is subject to taxation and must be included in your tax return. This type of income is categorized as ordinary income and is taxed at the regular income tax rates that apply to you. To minimize your taxable income, you are eligible to deduct expenses associated with property management and upkeep. It's important to note that when you sell a rental property, you may be responsible for paying capital gains tax as well as depreciation recapture tax.
Can a foreigner be a landlord in US?
Absolutely, individuals from foreign countries are permitted to become landlords in the United States. Foreigners can purchase real estate in the US as long as they adhere to the necessary legal requirements. However, non-US individuals who rent out their US property are obligated to pay a 30% withholding tax on the total amount of each rental payment. It is advisable for foreign landlords to engage a dependable property manager who is physically present at the property. Foreign investors are encouraged to establish a Limited Liability Company (LLC) for their rental properties. Nonetheless, it is crucial to understand that renting an apartment in the US as a foreigner necessitates having a legal authorization to reside in the country.
How much tax do you pay on rental income in US?
The tax amount you owe on rental income in the United States depends on your taxable rental income and your individual tax bracket. Rental income is categorized as taxable income and must be accurately reported on your tax return. The federal income tax brackets range from 10% to 37%. For instance, if your taxable rental income amounts to $50,000 and you are a single filer in 2022, your tax rate will be 22%. However, there are situations where rental income may qualify as qualified business income (QBI), potentially enabling investors to claim deductions of up to 20%. It is advisable to seek guidance from a tax professional for personalized advice concerning rental income taxation.
Are non residents subject to US estate tax?
Indeed, individuals who are not residents of the United States and possess assets in the country are liable to pay U.S. estate tax upon transferring property situated within the U.S. However, it's important to note that the rules and tax rates for estate tax vary between U.S. citizens and domiciliaries, and non-residents.
Do non-residents pay capital gains tax on US property?
Non-resident aliens who possess real estate in the United States are generally subjected to a 30% tax rate on the income derived from that property, unless it is directly associated with a U.S. trade or business. However, foreign individuals are typically not subject to capital gains taxes from U.S. sources, unless those gains are effectively connected to a U.S. trade or business. According to the regulations outlined in the Foreign Investment Real Property Tax Act (FIRPTA), when a non-resident of the U.S. sells real estate, 10% of the total sale price will be withheld. The withholding amount mandated by FIRPTA is generally equivalent to fifteen percent (15%) of $500,000, amounting to $75,000.
Can a foreigner inherit US property?
Yes, a foreigner can inherit US property. Noncitizens can inherit property just as citizens can. However, there may be differences in estate tax rules for nonresidents
What tax forms do non US residents use?
Non-resident aliens who are required to file an income tax return in the US must use Form 1040-NR, U.S. Nonresident Alien Income Tax Return. This form is used by nonresident alien individuals, estates, and trusts to file a US income tax return. Other non-resident tax return forms like 1040NR or 8843 are also available with instructions on the IRS website. If you are a foreign national investing in the US, you must only report your US sourced income on Form 1040NR.
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