(Partner Article) Considerations specific to foreign investors in real estate in New York are rarely addressed by real estate professionals. The most common mistake is to model real estate transactions of non-resident aliens on the same rules as those for Americans. However, doing so will have extremely heavy financial and fiscal implications. Nathaniel Muller, French lawyer in New York, explains why.
FIRPTA (Foreign Investment in Real Property Tax Act)
The FIRPTA is a withholding tax of 15% of the sale price that is paid to the IRS at the time of the transfer of title deed (closing). It is a kind of bond that the US tax authorities take to ensure that the seller of a non-resident foreign property does pay the federal capital gains tax. In effect, the American tax office then calculates the federal tax on the capital gain, and returns to the seller the difference between the 15% of the selling price and the tax due. But this process is currently about two years old, which has even more dramatic consequences for an investor who makes a 1031 exchange * and has to fill the remaining 15% with an additional cash infusion.
* A 1031 exchange is a way for an investor to defer the capital gain tax, by reinvesting an amount at least equivalent to that of the sale price of the property, in the acquisition of one or more other properties. The 1031 are subject to very strict conditions, particularly as regards the time period within which the new acquisition (s) must take place (six months from the closing of the sale).
There are exceptions to FIRPTA. In general, whether the property is owned by an individual or a corporation, the sale will be submitted to FIRPTA. But when the property is owned by entities structured for this purpose, the FIRPTA is not due. It is easier and more desirable to anticipate this as soon as the acquisition is made, but in certain cases, there are solutions that make it possible to change certain legal and / or accounting aspects of the entity before putting a property on the market. way to avoid the FIRPTA.
Inheritance tax
Americans are subject to the federal inheritance tax only for assets exceeding $ 11.4 million per individual ($ 22.8 million per couple) according to the 2019 figures. Unlike Americans, non-resident aliens are liable for the federal tax on inheritance from the first dollar inherited. In addition, trusts will not protect non-resident aliens from the federal inheritance tax.
This is also valid for surviving spouses. Although the surviving spouse is most commonly recognized as the owner of the property (s) he / she owned with the deceased spouse, the IRS will consider that the surviving spouse inherits a virtual gain. Between federal and New York State taxation, the surviving spouse, or heir, will have to settle about 50% of the virtual gain (roughly calculated as the value of the property on the day of death, minus the purchase price and a fixed credit of $ 60,000.00). This is valid regardless of the form of ownership (proper name or company).
However, there are solutions that completely avoid inheritance tax for non-resident aliens. In particular, the use of a two-tier corporation eliminates the estate tax.
To deepen these questions and find the best solution for your situation, contact directly Law Offices of Nathaniel Muller, your French law firm specializing in business law, real estate law and immigration.
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