Foreign investors who are non-residents of the USA

Foreign investors who are non-residents of the USA are subject to specific tax rules when they own property in the country. Here’s a breakdown of how they pay taxes on U.S. real estate:

1. Income Taxes on Rental Income

• Rental Income Tax: If a non-resident rents their U.S. property, they must report the income to the IRS. They have two options:?Gross Basis:?They can pay a flat 30% tax on the gross rental income without expense deductions. ?Basis (Election Required):?Alternatively, non-residents can be taxed on a net basis by filing an election with the IRS. This allows them to deduct property-related expenses (such as maintenance, property management, and mortgage interest) and be taxed on the net income at the U.S. graduated tax rates, similar to U.S. citizens and residents.

2. Capital Gains Tax on Property Sales

• Capital Gains Tax: When foreign investors sell their U.S. property, they are subject to capital gains tax on the profit. The tax rates vary: Long-Term Capital Gains: If the property is held for more than a year, the capital gains tax rate is typically 15% or 20%, depending on the investor’s income. Short-Term Capital Gains: If the property is sold within a year of purchase, it is taxed as ordinary income at higher rates.
• FIRPTA Withholding: Under the Foreign Investment in Real Property Tax Act (FIRPTA), 15% of the gross sales price is typically withheld by the buyer and sent to the IRS as a prepayment of taxes owed on the capital gain. If the withholding exceeds the actual tax due, the non-resident can file a tax return to claim a refund.

3. Estate Tax

• Estate Tax on U.S. Property: If a non-resident dies owning U.S. property, their estate may be subject to U.S. estate taxes. Non-residents do not receive the same high estate tax exemption as U.S. citizens (currently around $13 million). Instead, they get a much smaller exemption, typically only $60,000.Estate tax rates range from 18% to 40%, depending on the estate's value.

4. State Taxes

• State Income and Capital Gains Taxes: Besides federal taxes, foreign investors may be liable for state income taxes on rental income and capital gains when selling property. Each state has different tax rates and rules.

5. Tax Treaties

• Potential Tax Relief via Treaties: Some countries have tax treaties with the U.S. that can reduce or eliminate double taxation. These treaties often provide relief from U.S. taxes or offer lower rates on income and capital gains for residents of the treaty country.

6. Filing Requirements

• IRS Reporting: Foreign investors must obtain an Individual Taxpayer Identification Number (ITIN) to report rental income or capital gains. They must also file a U.S. tax return (Form 1040-NR) if they have taxable income from the property.

How Life Insurance Can Help Foreign Investors:

Life insurance can be an effective tool for foreign investors to manage tax liabilities and protect their estate in various ways:

1. Providing Liquidity for Estate Taxes

As mentioned, foreign investors are subject to U.S. estate taxes on their property holdings. Life insurance can help by providing liquidity to pay these estate taxes, so heirs do not need to sell the property or other assets at a loss. Since the life insurance payout is generally tax-free, it provides an immediate source of funds to cover estate taxes.

2. Covering FIRPTA Withholding

If a foreign investor's heirs plan to sell the property, they may face FIRPTA withholding. Life insurance can provide the necessary funds to avoid selling the property at a time when it's not optimal. The life insurance proceeds can help cover the FIRPTA withholding requirement, ensuring the estate can be settled smoothly.

3. Estate Equalization

For investors with multiple heirs, life insurance can help provide estate equalization. If one heir inherits the U.S. property, life insurance can benefit other heirs equally, avoiding disputes or the need to liquidate assets.

4. Maintaining Wealth Across Generations

Foreign investors can ensure that their heirs receive a guaranteed, tax-free benefit by purchasing a permanent life insurance policy. This allows them to transfer wealth more effectively and bypass potential capital gains taxes, estate taxes, and other inheritance costs.

5. Keeping the Real Estate

Heirs may prefer to keep the U.S. property, but the associated tax liabilities could make this difficult. Life insurance can ease this burden, ensuring the property stays in the family without financial strain.