WHAT EVERY INTERNATIONAL REALTOR NEEDS TO KNOW ABOUT REAL ESTATE AND GIFT TAXES ON FOREIGN BUYERS

US state tax is dramatically different for foreigners who are not permanent U.S. residents than for U.S. citizens and residents. While only taxable on U.S. based assets, the tax for ‘Non-Resident Aliens” (“NRAS”) is applied to transfers during life or at death on values in excess of US$60,000, rather than the current $5,400,000 threshold for citizens and “Resident Aliens”. And the top rate of 40% applies when the value of the US realty transferred is US $1M. Thus, if your foreign client closes on a beautiful $2M property on Monday and gets hit by a bus on Friday, his heirs can write the IRS an estate tax check for about $750,000.

Proper advance planning can avoid this result. Generally two basic alternatives are available. The first is to buy the US realty through a foreign corporation (or through a US LLC, owned primarily by the foreign corporation). Since the property is owned by a foreign corporation, the bus victim is not deemed to own and transfer US realty at death; but merely the stock of a foreign corporation. Alternatively, if the cash to buy the house is transferred outside the US to a US or foreign trust (for the benefit of his wife or children) before committing to the purchase, then the donor owns nothing at his death to be US estate taxed. While both methods solve the estate tax problem, the Trust is currently more advantageous from a US income tax perspective; because trusts get the benefit of the lower individual capital gain rates if the US property is sold. However, if the transfer into trust is not properly timed and documented, the IRS could assert that the donor made a taxable gift of the US realty, rather than the cash.

If your foreign client (or their spouse and children) is also getting a green card and moving to the US permanently, it would be a feather in your cap to advise them to consider US estate and gift planning for their foreign assets as well. Although their threshold for this tax will go up to $5.4M for both husband and wife, this will now include their home country and all other worldwide assets. Absent tax issues in their home country (Japan and Korea, but not China, have their own estate and gift taxes), placing the foreign assets into a US or foreign trust (or in some cases, selling the assets on an installment basis to family members) could be a simple way to avoid US estate tax and possibly income taxes on the owner or their beneficiaries who have relocated to the US.

This information is not presented to put you, as a realtor, in the position of giving tax advice to your foreign clients. The information is way too general; and this, of course, is not your job. In addition, every client’s situation is different and will need to be reviewed carefully. The purpose of Doorways International having this presentation for its readers is to make you aware of the magnitude of the US tax problems that are unique to your foreign buyers, and to encourage you to suggest that they consult an international tax adviser.

The author has practiced US tax law for international clients for over 40 years and is available to help foreign clients plan for US real estate investments throughout the US, with the help of local counsel where the property is located, as necessary.

Roger H. Epstein, Partner
Cades Schutte LLP
1000 Bishop St # 1200, Honolulu, HI 96813
Direct Dial: (808) 521-9222
Direct Fax: (808) 540-5063
Email: repstein@cades.com