7 Critical Tax Questions

Foreign Investors in US Real Estate

Paul B. Sundin, CPA

Disclaimer
Copyright 2014 by Sundin & Company, LLC
No part of this publication may be reproduced or transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, scanning, or otherwise without
the prior written consent by the publisher.
This eBook is intended to discuss basic information regarding tax issues facing foreign
investors in US real estate. This eBook is for informational purposes only and is not
intended to replace the services of a competent tax or legal professional. Each situation
is different and before you act on any information contained herein you must discuss
your situation with a qualified tax professional and licensed attorney. We are not
attorneys and, accordingly, do not give legal advice.
While the contents of this guide are updated periodically, tax laws are continuously
changing. Accordingly, we make no representations as to the completeness or accuracy
of the information contained.

In addition, there are no implied warranties of

merchantability or fitness for a particular purpose. No warranty may be created or

extended by sales representatives or written sales materials. Neither the publisher nor
author shall be liable for any loss of profit or any other commercial damages, including
but not limited to special, incidental, consequential or other damages.
In addition, certain tax structures in the US may have negative tax consequences in your
home country. You should consult with a tax professional in your home country prior to
implementing any tax structures discussed herein.
IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S.
federal tax advice provided in this communication is not intended or written to be used,
and it cannot be used by the recipient or any other taxpayer (i) for the purpose of
avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii)

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promoting, marketing or recommending to another party any transaction or tax-related

matter(s) addressed herein.
Should you have any questions or comments, please contact us at:
480-361-9400
or
paul@sundincpa.com

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Table of Contents
Disclaimer ................................................................................................................................................... 1
Introduction: So You Want to Invest in US Real Estate ....................................................................... 6
Question #1: How am I Taxed? ................................................................................................................ 8
Nonresident Aliens................................................................................................................................. 8
Visiting or Residing in the US ............................................................................................................ 10
Question #2: What are the Tax Rates? .................................................................................................. 12
Individual Tax Rates ............................................................................................................................ 12
Corporate Tax Rates ............................................................................................................................ 13
Trust Tax Rates ..................................................................................................................................... 13
A Word about Estate Taxes ................................................................................................................. 13
Tax Treaties ........................................................................................................................................... 14
Question #3: What Should my Entity Structure be? ........................................................................... 16
Individual Ownership .......................................................................................................................... 16
S Corporations ...................................................................................................................................... 16
C Corporations ...................................................................................................................................... 17
Partnerships .......................................................................................................................................... 17
Foreign Corporations ........................................................................................................................... 18
Limited Liability Companies (LLCs) ................................................................................................. 18
Forming an LLC.................................................................................................................................... 19
Question #4: What Can I Deduct? ......................................................................................................... 21
Basic Rental Expenses ......................................................................................................................... 21
Additional Rental Expenses ................................................................................................................ 22
Depreciation.......................................................................................................................................... 23
Question #5: What Forms Are Required to be Filed? ......................................................................... 25
Federal Requirements ......................................................................................................................... 25
State Requirements .............................................................................................................................. 25
Return Due Dates ................................................................................................................................. 26
Question #6: What are the Withholding Requirements? ................................................................... 27
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Foreign Investment in Real Property Tax Act .................................................................................. 27

Partnership Withholding .................................................................................................................... 28
Question #7: How do I Get a Tax Identification Number? ................................................................ 30
Do I Need One?..................................................................................................................................... 30
Conclusion ................................................................................................................................................. 32
How We Can Help ................................................................................................................................ 32

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Introduction: So You Want to Invest in US

Real Estate
Foreign investment in US real estate is at an all-time high

I believe that real estate is one of the fastest and most proven ways to build real wealth.
People ask me all the time about how to make money in real estate and the reality is that
individuals need to find an approach that works for them. If theres one thing I know for
sure, its that there are many ways to make money in real estate. Whether its in
flipping, development, buy and hold, land splits, you name it.

The only thing an

investor needs is a little education, some encouragement, and the guts to take the
plunge.
In todays marketplace, US real estate offers one of the best financial investments
available in the world. In addition to tax advantages, it can provide you with cash flow,
significant leverage, and capital appreciation. However, investing in US real estate
offers an endless array of complex legal, tax and compliance challenges.
The three main US tax issues that foreign investors need to be aware of are: (1) income
tax; (2) estate tax; and (3) gift tax. Some of these issues are rather straightforward, but
depending on your tax situation there may be entity structures that you can implement
that will make your investments more effective and tax efficient. With proper planning,
you can alleviate many of the concerns and sleep easy at night.
Many foreign investors will find themselves being assessed tax at the same rates as US
individuals. These rates begin at 10% and go up to the highest rate of 39.6%. Rental
real estate will often generate depreciation expense and other direct expenses, so most
investors will only pay rates at the lowest level of 10% (if they pay tax at all). The US tax

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code also has a very favorable long-term capital gains rate of 15% (subject to certain
income) that may apply upon the sale or disposition of the property.
In addition to federal taxes, investors will also have state taxes to consider. The US has
of course 50 states, but only 43 have a state income tax. But some states impose a
transfer tax and other assessments that can complicate the situation. Navigating state
tax law and filing the applicable tax returns is certainly not easy.
Before you acquire real estate you must consult a tax professional who has extensive
knowledge of foreign tax issues. The goal of this eBook is to answer some of the basic
questions that my firm gets asked on a daily basis. Unfortunately, we will not be able to
cover all the tax questions you may have, but at least this can become the starting point
in your tax analysis.

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Question #1: How am I Taxed?

There are many tax differences between resident aliens and
nonresident aliens

Nonresident Aliens
Resident and nonresident aliens are taxed in different ways. Resident aliens are
generally taxed in the same way as US citizens. Nonresident aliens are taxed based on
the source of their income and whether or not their income is effectively connected with
a US trade or business. A nonresident aliens income that is subject to US income tax
must be divided into two categories:
1. Income that is effectively connected with a trade or business in the US, and
2. Income that is not effectively connected with a trade or business in the US.
The difference between these two categories is that effectively connected income, after
allowable deductions, is taxed at graduated rates. These are the same rates that apply to
U.S. citizens and residents. Income that is not effectively connected is taxed at a flat
30% (or lower treaty) rate and does not allow any deduction for expenses. Rental real
estate is defined as income that is not effectively connected income and, therefore,
would be subject to the 30% withholding.
However, if you have rental real estate you can elect to have it treated as a US trade or
business for tax purposes. If you make this choice, you can claim deductions
attributable to the real property income and only your net income from real property is
taxed. The choice applies to all income from real property located in the United States
and held for the production of income and to all income from any interest in such

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property. If you make this election, you must attach a statement to your tax return that
addresses the following:

That you are making the choice.

Whether the choice is under Internal Revenue Code section 871(d) (explained
above) or a tax treaty.

A complete list of all your real property, or any interest in real property, located
in the US.

The extent of your ownership in the property.

The location of the property.

A description of any major improvements to the property.

The dates you owned the property.

Your income from the property.

Details of any previous choices and revocations of the real property income
choice.

As an example, lets assume you are a nonresident alien and you are not engaged in a
U.S. trade or business. You own a single family residence in the US that you rent out.
Your rental income for the year is $10,000 and this is your only US source income. In
addition, you have $6,000 in expenses, which includes property management fees,
insurance, property taxes, repairs and maintenance, depreciation and other
miscellaneous costs. The rental income would normally be subject to a tax at a 30% (or
lower treaty) rate, which would amount to $3,000.
But if you make the election discussed above, you can offset the $10,000 income by all
of your rental expenses. You are then taxed on the net income of $4,000 (reduced by
your exemption and any itemized deductions). Any resulting net income is taxed at
graduated rates. The result is a tax savings of potentially thousands of dollars.

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Visiting or Residing in the US

Even if you do not permanently reside in the US, you may end up staying long enough to
qualify as a resident for tax purposes. Aliens may be considered a resident alien for tax
purposes if they pass either the green card test or the substantial presence test.
Green Card Test
You are a US resident (for tax purposes) if you are a Lawful Permanent Resident of the
US at any time during the calendar year. This is known as the green card test. You are
a Lawful Permanent Resident of the US, at any time, if you have been given the
privilege, according to the immigration laws, of residing permanently in the United
States as an immigrant.
Generally, you will have this status if the US Citizenship and Immigration Service
(USCIS) has issued you an alien registration card. This will be on Form I-551, which is
also known as a green card. With this test, you continue to have resident status unless
you voluntarily renounce and abandon this status in writing to the USCIS. In
addition, your status can be administratively terminated by the USCIS, or your
immigrant status is judicially terminated by a federal court.
Substantial Presence Test
Most foreign real estate investors will not meet the green card test. However, because of
vacations and extensive stays in the US, they can find themselves meeting the
substantial presence test for the calendar year. To meet this test, you must be physically
present in the United States for at least:
1. 31 days during the current year; and
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2. 183 days during the 3-year period that includes the current year and the 2 years
just before that, counting:

All the days you were present in the current year, and

1/3 of the days you were present in the first year before the current year,
and

1/6 of the days you were present in the second year before the current
year.

For example, assume you were physically present in the US for 120 days in each of the
years 2011, 2012, and 2013. To determine if you meet the test for 2013, you would count
the full 120 days present in 2013, 40 days in 2012 (1/3 of 120), and 20 days in 2011 (1/6
of 120). Because the total for the 3-year period is 180 days (less than 183 days), you
would not be considered a resident under the substantial presence test for 2013.
Accordingly, you would be taxed as a non-resident alien.

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Question #2: What are the Tax Rates?

Tax rates differ depending on the structure you implement and
your tax bracket

This is one of the first questions foreign investors ask. US citizens will often complain of
high taxes, but the reality is that the US has relatively low tax rates compared to other
industrialized countries.
The goal here is to provide a detail of the applicable US tax rates. However, the US has
tax treaties with many countries and those rates should be followed as necessary. We
will also cover some of the issues relating to tax treaties.

Individual Tax Rates

Individual taxpayers in the US pay taxes at marginal tax rates that start at 10% and go
up to 39.6%. The rates are based on taxable income that is after any exemptions and
itemized deductions. In addition, tax brackets vary depending on your filing status
(single, married head of household, etc.). The table below outlines tax rates for single
individuals. Please realize that state taxes, if applicable, would be in addition to these
amounts.

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Corporate Tax Rates

Corporations will be discussed in greater detail later. However, they are subject to
double taxation. This tax is once at the entity level and once at the individual level. In
addition, they are not subject to favorable capital gains rates.
However, corporations can be a good structure for foreign investors who may have
concerns over estate or gift tax. These issues should be discussed in great detail with
your tax and legal professionals. The corporate tax rates are detailed below:

Trust Tax Rates

Trust rates are certainly higher than the rates for individuals. They are listed below:

A Word about Estate Taxes

Deceased nonresidents who were not American citizens are subject to U.S. estate
taxation with respect to their U.S. based assets. U.S. based assets include American real
estate, tangible personal property, and securities of U.S. companies. A nonresidents
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stock holdings in American companies are subject to estate taxation even though the
nonresident held the certificates abroad or registered the certificates in the name of a
nominee. Assets that are exempt from U.S. estate tax include securities that generate
portfolio interest, bank accounts not used in connection with a trade or business in the
U.S., and insurance proceeds.
The U.S. has estate and gift tax treaties with the following countries: Australia, Austria,
Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, South
Africa, Sweden, Switzerland, and the United Kingdom. Each of these treaties alters the
rules discussed above with respect to the application of the estate and gift taxes to
nonresident aliens who reside in these countries and should, therefore, be reviewed
before rendering any estate or gift tax advice for such persons.
Estate tax treaties between the U.S. and other countries often provide more favorable
tax treatment to nonresidents by limiting the type of assets considered situated in the
U.S. and subject to U.S. estate taxation. Executors for nonresident estates will need to
examine such treaties where applicable.
Executors for nonresidents must file an estate tax return ( Form 706NA, United States
Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of
the United States) if the fair market value at death of the decedents U.S. based assets
exceeds $60,000 ($60,000 is the exemption equivalent of the applicable unified credit
of $14,000). If the decedent made substantial lifetime gifts of U.S. property, a U.S.
estate tax return may be required even though the value of the decedents U.S. situated
assets is less than $60,000 at the date of death.

Tax Treaties
The United States has income tax treaties with a number of foreign countries. Under
these treaties, residents (not necessarily citizens) of foreign countries are taxed at a
reduced rate, or are exempt from U.S. income taxes on certain items of income they

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receive from sources within the United States. These reduced rates and exemptions vary
among countries and specific items of income.
If the treaty does not cover a particular kind of income, or if there is no treaty between
your country and the United States, you must pay tax on the income in the same way
and at the same rates shown in the instructions for Form 1040NR.
Many of the individual states of the United States tax the income of their residents.
Some states honor the provisions of U.S. tax treaties and some states do not. Therefore,
you should consult the tax authorities of the state in which you live to find out if that
state taxes the income of individuals and, if so, whether the tax applies to any of your
income, or whether your income tax treaty applies in the state in which you live.
Treaty provisions generally are reciprocal (apply to both treaty countries). Therefore, a
U.S. citizen or resident who receives income from a treaty country and who is subject to
taxes imposed by foreign countries may be entitled to certain credits, deductions,
exemptions, and reductions in the rate of taxes of those foreign countries.

Treaty

benefits generally are available to residents of the United States. You should carefully
examine the specific treaty articles that may apply to find if you are entitled to a tax
credit, tax exemption, reduced rate of tax, or other treaty benefit or safeguard.

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Question #3: What Should my Entity

Structure be?
The entity structure is one of the most important decisions you
can make and should not be taken lightly

Determining the proper entity structure can be complex. Any discussions surrounding
entity structure should involve your accountant as well as an attorney. We will provide
an overall discussion on some of the pros and cons of the various structures provided to
investors.

Individual Ownership
A foreign investor may acquire real estate individually. This requires minimal set up
and allows for reduced tax and compliance issues. However, even though owning real
estate individually is easy to maintain, it does not offer the legal protection that other
structures offer, such as a limited liability company. We will discuss this structure in
greater detail shortly.

S Corporations
S corporations are corporations that elect to pass corporate income, losses, deductions
and credits through to their shareholders for federal tax purposes. Shareholders of S
corporations report the flow-through of income and losses on their personal tax returns
and are assessed tax at their individual income tax rates. This allows S corporations to
avoid double taxation on the corporate income.

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However, nonresident aliens are not allowed to be shareholders in S Corporations. In

addition, S Corporations typically do not offer any special tax advantages to real estate
investors.

C Corporations
For federal income tax purposes, a C corporation is recognized as a separate taxpaying
entity. The profit of a C corporation is taxed to the corporation when earned, and then is
taxed to the shareholders when distributed as dividends. This creates a double tax. The
corporation does not get a tax deduction when it distributes dividends to shareholders.
In addition, shareholders cannot deduct any loss of the corporation.
For US citizens a C Corporation is rarely a good option for rental real estate unless the
taxpayer is a dealer. But for nonresidents, a C Corporation can be good if there are
concerns over estate and gift taxes. This is a discussion you will have to have with your
tax advisor.

Partnerships
A partnership is the relationship existing between two or more persons who join to carry
on a trade or business. A partnership must file an annual information return to report
the income, deductions, gains, losses, etc., from its operations, but it does not pay
income tax. Instead, it "passes through" any profits or losses to its partners. Each
partner includes his or her share of the partnership's income or loss on his or her tax
return.
Partnerships are very flexible entities and are often used for real estate activities. If you
are pooling your funds together with other partners then this would be the filing option
for you.

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Foreign Corporations
Like other entities, foreign corporations can be taxed on a gross or net basis. However,
if they make an election to be taxed on a net basis they will generally be subject to the
branch profits tax (BPT). This tax is calculated as 30% of the dividend equivalent
amount unless calculated differently or excluded based on a tax treaty. In addition to
BPT, the entity will have to pay normal income tax. The result is an incredibly high
effective tax rate that will often exceed 50%. Accordingly, this tax structure is often not
recommended.
The main advantage to owning real estate through a foreign corporation is that it will
allow you to bypass US estate tax. The US estate tax is based on individual non-resident
ownership of US assets, but in this case the assets are directly owned by a foreign
corporation. The ownership of the foreign corporation shares by the individual does not
constitute US property. Upon a nonresidents death, the foreign shares are merely
passed to the heirs outside of US estate tax.

Limited Liability Companies (LLCs)

A limited liability company (LLC) is a business entity organized in the United States
under state law. It is a hybrid type of legal structure that provides the limited liability
features of a corporation and the tax efficiencies and operational flexibility of a
partnership. LLCs are almost universally preferred for holding investment real estate,
having replaced the limited partnership as the entity of choice.
Owners of an LLC are called members. Since most states do not restrict ownership,
members may include individuals, corporations, other LLCs and foreign entities. There
is no maximum number of members. Most states also permit single member LLCs,
those having only one owner.
In general, members are protected from personal liability for business decisions or
actions of the LLC. This means that if the LLC incurs debt or is sued, members' personal

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assets are usually exempt. This is similar to the liability protections afforded to
shareholders of a corporation. Keep in mind that limited liability means "limited"
liability - members are not necessarily shielded from wrongful acts.
The federal government does not recognize an LLC as a classification for federal tax
purposes. An LLC business entity must file a corporation, partnership or sole
proprietorship tax return. A business with at least 2 members can choose to be classified
as a corporation or a partnership, and a business entity with a single member can
choose to be classified as either an association taxable as a corporation or disregarded as
an entity separate from its owner, a disregarded entity.

Forming an LLC
While each state has slight variations to forming an LLC, there are some general
principles:
Choose a Business Name. There are 3 rules that your LLC name needs to follow:
(1) it must be different from an existing LLC in your state;
(2) it must indicate that it's an LLC (such as "LLC" or Limited Company"); and
(3) it must not include words restricted by your state (such as "bank" and
"insurance").
File the Articles of Organization. The "articles of organization" is a simple
document that legitimizes your LLC and includes information like your business name,
address, and the names of its members. In most states, you file with the Secretary of
State or the Corporation Commission. However, other states may require that you file
with a different office such as the Department of Commerce and Consumer Affairs,
Department of Consumer and Regulatory Affairs, or the Division of Corporations &
Commercial Code. Each state will have its own filing requirements.
Create an Operating Agreement. Most states do not require operating agreements.
However, an operating agreement is highly recommended for any LLC because it
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structures your LLC's finances and organization, and provides rules and regulations for
operation. The operating agreement would also include percentage of interests,
allocation of profits and losses, member's rights and responsibilities and other
provisions. We will discuss operating agreements in more detail later.
Obtain Licenses and Permits. Once your business is registered, you may be
required to obtain business licenses and permits. Regulations vary by industry, state and
locality.
Announce Your Business. Most states require the extra step of publishing a
statement in your local newspaper about your LLC formation. Check with your state's
business filing office for requirements in your area.

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Question #4: What Can I Deduct?

There are many deductions available to the real estate
investordont miss out

Just about every dime that you spend on your rental property is deductible in the eyes of
the IRS so long as it is ordinary and necessary. This includes things like property taxes,
repair costs and management fees. Deductions also include smaller ticket items such as
the costs associated with visiting your rental properties and the paper you had to buy to
print out a lease. In general, if you have to pay for something having to do with your
rental property it is a tax deduction.
Generally, you cannot deduct personal, living, or family expenses. However, if you have
an expense for something that is used partly for business and partly for personal
purposes, divide the total cost between the business and personal parts. You can deduct
the business portion.

Basic Rental Expenses

The rules of what you can legally deduct are very broad. Some deductions are basic and
obvious, while other deductions may be a little surprising. Your goal is to deduct every
legal tax deduction you are afforded under the law.
So lets take a closer look at some of the tax deductions available to real estate investors.
Most clients are pretty good at tracking these types of basic deductions. Here is a
rundown of some of the basic types of expenses:

Advertising expenses. Advertising expenses can include things like paying for
newspaper or online for rent ads, paying for signs that say for rent and even
paying for an advertising company to promote your properties.

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Cleaning and maintenance costs. These costs could include the supplies
you need to maintain or clean the property yourself or if you hire someone else to
do the job for you.

Commissions paid. If you need a service professional, including a real estate

agent, then the commissions you pay to them are tax deductible.

Depreciation (we will discuss this later)

Insurance costs. Insurance costs can include property insurance or other types
of insurance that are required for a rental property.

HOA fees. This would include all fees and assessment.

Interest. Specifically as it relates to mortgage loans secured by the property.

Legal & professional fees. This can include attorney fees as well as court
costs and fees related to inspections.

Management fees. If you hire someone else to manage your property or rental
activities then you can deduct the fees.

Taxes. This would include property taxes and local rental taxes and assessments.

Utilities. This would include water, sewer, electric and gas.

Additional Rental Expenses

As discussed, most property owners are pretty good at getting the above deductions
calculated properly. But there are also some overlooked deductions for rental properties
that you may be able to claim. Some examples of these deductions include:

Telephone and Internet. These would be services that you pay to promote,
manage or advertise your rental property. You may need to allocate the expenses
between business and personal use.

Office expenses. These would relate to your home office including stationary,
office supplies and postage as long as they relate to your rental property.

Local transportation expenses. This would include a mileage deduction

that you would take to visit and maintain the property.

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Travel expenses. These expenses can have anything to do with travel, whether
you needed to visit your rental property to check on deferred maintenance or if
you just wanted to make sure that the parking lot was free from snow. You may
also be able to deduct the travel costs associated with real estate conferences,
courses and camps that you attend to further your knowledge. These expenses
count as deductions, as long as they are not overly extravagant.

Interest on credit card debt. As long as the interest is on balances that were
derived from rental property activities it is deductible.

Meals & entertainment. As long as they pertain to rental properties.

Education and books. These are purchased to further your understanding of

rental properties and property management.

Equipment rentals. Could be for a copy machine or equipment used at a

property.

Professional dues. These are for investor groups or property associations.

Accountant fees. Fees associated with tax advice and completing tax returns.

Subscriptions. This includes magazines and newsletters having to do with real

estate management or purchasing properties.

Employee reimbursements. If an employee of yours pays for anything that

has to do with your rental property and you reimburse them for the cost, this
reimbursement is tax deductible.

Depreciation
Depreciation is essentially a non-cash deduction against your rental income.

It is

sometimes called a phantom expense and it can be used to save you quite a bit of
money. The IRS allows you to take a deduction based on the perceived decrease in the
value of the real estate.
Land is not depreciable. But if you have rental real estate you can depreciated the
building, structure, improvements and equipment associated with the property.

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Depreciation assumes that your real estate is actually declining as a result of wear and
tear. But we know this is not that case. Not many other forms of investment offer
comparable depreciation deductions. As a result of depreciation, you may actually have
cash flow from your property but you may show a tax loss. This of course lowers your
tax bill.

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Question #5: What Forms Are Required to be

Filed?
There can be a maze of federal and state forms that need to be
filed depending on where your properties are located

Federal Requirements
The federal filing requirements will vary depending on your entity structure. But below
is a list of the applicable forms that need to be filed:

Nonresidents filing as individuals or using an LLC that is filing as a disregarded

entity are required to file Form 1040NR.

Partnerships are required to file Form 1065.

In addition, the partners are

required to file Form 1040NR.

C Corporations will file Form 1120.

State Requirements
One issue that foreign investors dont often understand is that if they own property in a
specific state they may have tax liabilities and filing responsibilities in that state. Each
state will generally tax them based on source income generated in that state.
In general, if a partnership has operating activities in a given state then that state has
the right to tax the partner on his or her share of partnership income. So in theory you
may find that you would need to file in any state that the partnership has real estate
operations. However, each state has separate minimum filing requirements. For
example, many states will not require you to file unless you have earned a certain

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amount of income in the state (say for example $1,000). So if you have earned less than
this amount you would not have to file a return in that state.
As a result of depreciation, your taxable income will likely be substantially lower than
any distributions you may receive; so many investors would not be subject to state filing
requirements. For the foreign investor, make sure that you verify both resident and
non-resident filing requirements as they often can vary from state to state. This part of
the process can be difficult, so that is where the use a tax professional can help.
To further complicate the issue, several states are now imposing withholding
requirements on pass-through entities for investors. So for partners who live outside of
the state in which the real estate is located they may find that some of their distributions
are being withheld by the partnership and remitted to the state. Once they file a state
tax return they will often have this money refunded to them (or possible owe more in
tax). However, they will still have to file a state tax return further complicating their tax
situation.

Return Due Dates

If you were an employee and received wages subject to U.S. income tax withholding, file
Form 1040NR by the 15th day of the 4th month after your tax year ends. A return for the
2013 calendar year is due by April 15, 2014.
If you did not receive wages as an employee subject to U.S. income tax withholding, file
Form 1040NR by the 15th day of the 6th month after your tax year ends. A return for the
2013 calendar year is due by June 15, 2014. However, the above discussion relates to
your federal taxes. Many states require your state return to be filed by April 15th for a
calendar year taxpayer.
Six month extensions can be filed that will give you additional time. But please be
aware, an extension is merely an extension of time to file, but not to pay your taxes. So
if you owe, you will have penalties and interest.

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Question #6: What are the Withholding

Requirements?
Many CPAs dont understand the withholding requirements
that foreign real estate investors face

Foreign Investment in Real Property Tax Act

The Foreign Investment in Real Property Tax Act of 1980 is normally called
FIRPTA. FIRPTA authorized the United States to tax foreign persons on dispositions of
U.S. real property interests. It requires a buyer of real estate to withhold 10% of the
gross sales price (subject to certain exceptions and exclusions) and remit the funds to
the Internal Revenue Service if the seller is a foreign person. This includes but is not
limited to a sale or exchange, liquidation, redemption, gift, transfers, etc.
A foreign person is defined as a nonresident alien individual, a foreign corporation,
partnership, trust, estate or other entity. The tax itself is levied on the gross amount
realized by the seller with no allowance or deduction for selling expenses. However,
many foreign investors qualify for an exception.

The amount can be reduced or

eliminated in the following circumstances:

The sales price is not more than $300,000 and the purchaser has definite plans
to reside in the property for at least 50% of the number of days the property is
used by any person during each of the first two 12-month periods following the
date of transfer.

The alien provides a certification stating, under penalties of perjury, that he or

she is not a foreign person.

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The alien provides a withholding certificate showing that a lesser amount should
be withheld.

The alien provides a written notice that no recognition of any gain or loss on the
transfer is required because of a non-recognition provision in the Internal
Revenue Code (for example, the house qualified as the aliens principal residence
for two of the last five years).

The amount the alien realizes on the transfer is zero.

The property is acquired by the U.S. government, state, possession, political

subdivision or the District of Columbia.

Certain other provisions related to disposition of corporate or partnership

interests or the lapse of an option.

Partnership Withholding
Tax withholding is also required at the federal level (by the IRS) for foreign partners. A
partnership that has income effectively connected with a U.S. trade or business (or
income treated as effectively connected) must pay a withholding tax on the effectively
connected taxable income that is allocable to its foreign partners. The withholding tax
rate for effectively connected income allocable to non-corporate foreign partners is
39.6%, but remains at 35% for corporate foreign partners, for tax years beginning after
December 2012.
The withholding tax liability of the partnership for its tax year is reported on Form
8804. A Form 8805 for each foreign partner must be attached to Form 8804, whether
or not any withholding tax was paid.

Payment of the tax is done using another

form. The partnership must use Form 8813, Partnership Withholding Tax Payment
Voucher (Section 1446), to pay quarterly installments of withholding tax to the IRS. A
Form 8813 must accompany each payment of tax made during the partnerships tax
year.

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The IRS allows foreign partners to certify to the partnership prior year deductions and
losses that will carry over to the current year. In addition, a nonresident alien partner
can also certify to the partnership that the partnership investment is (and will be) the
only activity of the partner for the partners taxable year that gives rise to effectively
connected income, gain, loss or deduction.
In the case of a partner certification, the partnership is not required to withhold and pay
a withholding tax with respect to the foreign partner if the partnership estimates that
the annualized or actual tax due is less than $1,000.
It is important to note that the partnership must pay the withholding tax regardless of
the amount of the foreign partners ultimate U.S. tax liability (which is often dependent
on other taxable income) and regardless of whether or not the partnership makes any
cash distributions during its tax year to the partners.

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Question #7: How do I Get a Tax

Identification Number?
Obtaining an ITIN can be a tedious process but it should be
obtained ASAP

A nonresident alien required to file a U.S. tax return must get an Individual Taxpayer
Identification Number (ITIN). This is a tax processing number issued by the IRS. It is a
nine-digit number that always begins with the number 9 and has a range of 70-88 in the
fourth and fifth digit. The IRS issues ITINs to individuals who are required to have a
U.S. taxpayer identification number but who do not have, and are not eligible to obtain a
Social Security Number (SSN) from the Social Security Administration (SSA).

Do I Need One?
If you have US source income then in most situations you will be required to file a tax
return with the IRS. The ITIN will allow the IRS to match any income earned in the US
to your federal tax filing. ITINs are issued regardless of immigration status because
both resident and nonresident aliens may have a U.S. filing or reporting requirement
under the Internal Revenue Code.
But an ITIN may be required even if you dont have a requirement to file a tax return. In
many situations you may be required to complete a Form W8 and supply an ITIN. The
requirement to furnish an ITIN will often depend on the type of income you have in the
US and type of Form W-8 you are required to complete.

Many nonresidents get

confused as to whether they need an ITIN for themselves or an Employer Identification

Number (EIN) that would be required for an entity. In many situations they will need
both.
Here are a few situations in which an ITIN is required:
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A resident alien living in the US who is required to file a US tax return;

A non-resident alien who needs to file a tax return;

A non-resident alien who desires to claim tax treaty benefits and is required to
verify eligibility by filing the applicable W-8 form; and

A non-resident alien subject to withholding under FIRPTA.

The process for obtaining an ITIN is as follows:

1) Complete and sign a Form W-7 application Application for IRS Individual
Taxpayer Identification Number.
2) With your Form W-7, you must include your proof of identity. This can be done
with original documents (not recommended) or they can be certified copies by
the issuing agency. There are numerous documents that can prove your identity,
but the most common is your passport. In addition, you may also submit a
drivers license and a birth certificate (both to be included together).
3. The Form W-7 along with your proof of identification are then submitted along
with your final income tax return.
The W7 should be accurately completed or else the IRS will return it. There is nothing
more frustrating than having to resubmit the form. Rememberany copies of passports
will not be returned.
If you qualify for an ITIN and your application is complete, you will receive a letter from
the IRS assigning your tax identification number usually within six to eight weeks.
ITINs issued on or after January 1, 2013, will expire on December 31 five years after the
ITIN was issued. The five years include the year the ITIN was issued. At this time,
ITINs issued prior to January 1, 2013 are not affected.

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Conclusion

There are plenty of advantages to investing in US real estate. You have the opportunity
to make money through rental cash flow and capital appreciation. In addition, you will
have favorable tax write-offs (including depreciation) and possibly favorable long-term
capital gains rates.

How We Can Help

Foreign real estate investors have unique tax situations that are not like the typical CPA
firm client. You have important questions that need to be answered. Thats where we
come in.
Were experts at providing strategic tax planning for your US real estate activities. We
offer a personal, hands-on approach that you simply wont find with most CPA firms.
We bring a depth of insight and personal engagement to our client relationships.
As an experienced and licensed CPA firm, we know that foreign investment in US real
estate can present tax, legal, and compliance complexities. As a foreign investor, you
want to spend your time acquiring and managing your real estate investments. You
dont want to be spending your time worrying about US tax issues.
Not only do we understand the tax issues you face, we know real estate. At Sundin &
Fish, you will be advised by real estate tax experts who not only understand the
importance of high quality tax services, but also understand real estate transactions. We
know our work is technically challenging, but our goal is to present it as simply as
possible. We strive to make complex tax issues easy to understand.

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We help our clients with the following:

Entity structuring and review of your current real estate activities;

Tax planning so you can take advantage of all legal tax deductions;

Compliance review so that you have no red flags or issues with the IRS;

A comprehensive range of accounting, tax and advisory services

Preparing US federal tax returns as well as returns in all US states; and

Answer any questions you have about the process.

When it comes to foreign tax issues, we offer industry expertise and specialized
knowledge. Doing business in the US offers its own set of challenges and requires us to
help clients in many ways. You need to spend your time on your real estate activities
and you do not want to worry about your taxes. Contact us today at 480-361-9400 or
email us at paul@sundincpa.com.

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