Taxation of Investments in the USA
The improvement of the US financial markets and the volatility in the real property sector continue to attract a growing number of international investors. Though the tax legislation that applies to financial market investments is relevantly straight-forward, some tax implications may arise. On the other side, the tax law and the regulations that govern rental income and real property investments are considerably burdensome to many international investors. To address all aspects of the taxation of nonresidents with US investments we have developed services addressing
Rental Income and Tax Returns for International Investors in US Real Property
The US tax law treats rental and royalty income as passive and requires a fixed 30% rate of withholding on gross proceeds paid to nonresident investors. However, nonresidents may elect to treat the rental or royalty income as "effectively connected with a US trade or business." Once the election is made, the gross rental or royalty income received or accrued during the year would be taxed on a net basis after all applicable rental expenses had been deducted. The election is made on a timely filed return and Schedule E is attached to report income, expenditures, and deductions.
If the rental expenses exceed the rental income, the loss realized could be used to offset other ordinary income, subject to the provisions of the at-risk and passive activity loss limitation rules. Different rules apply if you operate the rental activity as a real-property professional, or as a hotel, short-term rental facility, nursing home, or any similar arrangement that includes the provision of additional services to tenants.
Capital vs. Deductible Expenses
The accurate completion of your tax return emphasizes a distinction between capital and allowable expenses. The taxing authorities weigh many factors when considering whether expenditures are required to be capitalized or should be afforded treatment as a current deduction. The case law has long established that improvements, betterments, and restorations that put the property in a "like-new" or better condition, prolong its useful life, adapt it to a new or different use, or enhance its value must be capitalized.
Capitalized expenses are subsequently recovered through an annual depreciation or depletion for a statutory period that approximates the useful life of the property. To ease taxpayers, "de minimis" safe harbor rules were adopted to allow a current deduction for secondary capital expenditures. However, costs that attach to land are always capitalized and cannot be recovered through deduction or depreciation.
On the other hand, incidental repairs, restorations of the property to its original condition and improvements that keep the property in an efficient operating condition could be deducted currently. The most common expenses for rental activities include small repairs and maintenance costs, mortgage interest, advertising, cleaning, management, professional fees, supplies, taxes, insurance, certain traveling expenses, and commissions. The deductibility of costs could be limited if the rental property is also a vacation home or personal use property.
Moreover, US real property held by non-resident individuals falls within the scope of the FIRPTA regulations. Consequently, a sale or disposition of a US real property investment triggers a statutory 10 % federal tax withholding over the gross amount realized from the transaction. When title passes, the tax is remitted to the IRS and reported on Form 8288. A refund of the over collected federal tax may be claimed on the tax return of the investor.
Rental Income Tax Services
The significant variations in the tax law and their application to a single unit of property require careful analysis of the facts and circumstances of each case. Our licensed Certified Public Accountants and IRS Enrolled Agents are available to assist you throughout the life of your investment. We focus our services on international investors and the provision of
- Analysis of expenses related to the acquisition, construction or repair of a US real property
- Determination of tax residency and associated requirements
- Assistance with the FIRPTA regulations and Forms 8288, 8805 and 1042-S
- Assistance with elections, depreciation, and depletion
- Preparation of all federal and state rental income tax returns, including Form 1040-NR and Schedule C or E
- Classifications, elections, and returns for rental property investments held through an LLC
- Bookkeeping and record keeping services designed to ensure allocation of basis and compliance
- Assistance with Form 3115 "Application for Change in Accounting Method"
- Assistance with Forms W-8BEN, IMY, EXP, and ECI
- Tax advisory services, amendments of prior-year tax returns
Tax Services for International Investors in US Companies
The income from investments is considered passive when paid to nonresident individuals, which requires a statutory 30% withholding tax unless an exemption or a lower tax treaty rate prevails. For instance, most capital gains and portfolio interest are tax exempt income when earned by nonresident individuals. If you reside in a tax treaty country, you may also qualify for a preferential tax rate on dividends, taxable capital gains and interest, royalties and other passive income. Currently, the United States maintains a tax treaty network that includes 65 countries.
However, a complexity arises from the application of the "beneficial owner" concept and the backup withholding tax provisions. For instance, the US tax treaties restrict the preferential rate of withholding to only the beneficial owner of the income. The beneficial ownership is rarely an issue when the income is earned by a single individual or corporation. When fiscally transparent entities, conduit structures, pension funds, or trusts hold the investment on behalf of others, significant limitations may apply. Furthermore, a failure to provide a US tax number or a withholding certificate may trigger 28% back-up withholding tax. The backup tax is applied on gross proceeds and significantly increases the tax burden on the taxpayer.
To relieve your US tax obligations, we expertise in the provision of services to non-resident investors affected by incorrect withholding tax rate or the 28% backup tax rules. Our streamlined tax services cover
- Income tax returns and refund of overpaid income taxes
- Assistance with and completion of withholding certificates on form W-8BEN, ECI, EXP, or IMY
- ITIN and EIN applications for individuals and entities seeking an exemption or a tax refund
- Submission of claims for refund and related filings
- Interpretation and application of double taxation avoidance agreements, including the US, the UN, and the OECD Model Tax Treaties
Should you wish to register for our tax services for investors, you may do so at any time. Did not find what you were looking for? Ask your questions and get a free quote with more information about how we can assist you further. You may also contact us directly.