Foreign Owned Real Estate – Small Election, Big Tax Savings
A common investment into the U.S. market is real estate, which is often rented to produce income. This investment has questions that need to be answered regarding things such as holding structure and exit strategy. However, there is one extremely important tax item that is very straightforward.
Generally, under U.S. tax law, rental income is taxed to a foreigner at a flat rate of 30% on the GROSS revenue. Yes, gross, this means no deductions are allowed. The rent loses 30% right off the top without any regard for management fees, real estate taxes, repairs and maintenance, etc. Many times, rental real estate is a long term investment with the year to year income near a break-even point. This means that a 30% tax right off the top could be very burdensome.
In order to avoid this, taxpayers can make an election to have the rental real estate treated like a business. This allows all deductions to be taken against the income. As mentioned, with year to year income usually near a break-even point, this means taxpayers will go from 30% off the top to paying little to no tax on the yearly income. The election is very simple and is an attachment to the return, but the catch is that there is a time limit on making the election. Therefore, investors need to be proactive about filing their taxes.
Investing in the U.S. can require detailed planning and tax analysis. However, sometimes there are very simple rules that can have a major effect. Rental income may be the best example, and the example I most frequently use in my presentations to encourage people to always ask the question. A quick phone call or email and then a brief attachment to your tax return could make for big tax savings.