What are the tax implications for a foreigner buying real estate property in California?

Asked almost 4 years ago - Union City, CA

What would the computation of taxes for a foreign buyer be? Would having a nonrsident alien in the title help in minimizing the taxation?

Additional information

The property is to be used for personal purposes and the title will be under the individual's name but also looking for ways to reduce incurring US taxes.

Attorney answers (2)

  1. Frank Wei-Hong Chen

    Contributor Level 20

    Answered . Consult a tax accountant before you invest in any real estate in the U.S.

    There are two kinds of taxes associated with owning residential property, property taxes (which everyone pays regardless of resident or non-resident), and capital gains taxes (due upon sale or disposition of the property).

    Under U.S. tax tax law, all persons, whether foreign or domestic, must pay income tax on dispositions of interests in U.S. real estate (U.S. real property interests). Domestic persons are subject to this tax as part of their regular income tax.

    Foreign Investment in Real Property Tax Act (FIRPTA), 26 USC 897, is a United States tax provision that imposes income tax on foreign persons disposing of United States real property interests. Tax is imposed at regular tax rates for the type of taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 10% to an amount that will cover the tax liability, upon application in advance of sale to the Internal Revenue Service.

    Foreign persons are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. FIRPTA treats gain on disposition of an interest in United States real property as effectively connected income subject to regular tax.

    In order to ensure tax collection from foreign taxpayers, FIRPTA requires buyers of U.S. real property interests to withhold 10% of the sales price. The seller may apply to the IRS to reduce this 10% to the amount of tax estimated to be due. The IRS routinely and quickly approves such seller applications.

    FIRPTA applies in virtually all cases where a foreign owner of a U.S. real property interest disposes of (sells) such interest. Provisions of the law which would prevent recognition of gain generally do not apply unless the seller receives a U.S. real property interest in a qualifying nonrecognition exchange.

    Again, please consult a tax accountant before you invest in any real estate in the U.S.

  2. Frank Wei-Hong Chen

    Contributor Level 20

    Answered . Your question is a bit too broad. Are you referring to residential property such as a single family residence to occupy for oneself, or income producing property (commercial, industrial, residential rental)? In other words, will there be regular rental income?

    Are you referring to vacant land? Is the investor planning to build and develop?

    Is the investor looking for short term gain or long term gain?

    Will there be more than one investor?

    Will title be held in the individual's name, or in the name of an entity such as an LLC, corporation or limited partnership?

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