U.S. tax implications on real estate for foreign investors

Investors who want to branch out and invest in U.S. residential properties tend to feel apprehensive about taking such a big gamble. After all, it’s an entirely different country with different laws, regulations, and tax implications. Many find that it’s a bridge they dare not cross because of all the confusion around it.

Being “fear-frozen” or unwilling to progress because you’re not ready to take the risk is only natural. Your entire mindset needs to shift when it comes to the U.S. or other foreign investments and you need to see them as viable rather than precarious.   

But investing in the U.S. doesn’t have to be so scary once you understand the basics of the taxes you need to take into consideration. Yolley Thomas-Kalos, Director of YTK&Co and a registered and licensed tax agent and an accountant encourages people to invest now while the market is hot.

“This is a very good time to invest, there are many opportunities in the U.S. right now,” Yolley said. 


What is the biggest difference between investing in the U.S. and Australia?

Before jumping into investing in U.S. residential property, it’s important to understand the main differences between investing in the two countries. 

When it comes to mortgage rates, stamp duties, and how the market works, for example, there are several glaring differences:

  • Mortgage rates in the U.S. tend to be more long-term compared to Australian mortgage rates. In the U.S., it’s normal for their rates to span over years, sometimes five or more. Whereas in Australia, it’s a fraction of the time, clocking in at one to five years. 
  • When it comes to stamp duties, the U.S. has little to none at all, attracting plenty of foreign investors. Australia infamously has heavy stamp duties that make investing in Australian real estate very expensive. There are even added charges like the Land Transfer Charge which pile on top of the already exorbitant charges a downpayment in Australian real estate would demand.
  • In terms of the nature of the market, the U.S. is much more relaxed and flexible, making investments and purchases simpler. But usually a team of various experts are involved in order to maintain and promote the property whereas in Australia, real estate agents take care of everything.

And the biggest difference is ultimately price. Foreign investors are keen on the U.S. residential property market because of the incredibly low prices and the possibility of positive cash flow that can help them find a new stream of income. 

“You do not need as much cash investment in the U.S., whereas in Australia it’s near impossible. The deals you can get in the U.S. are based on the area you’re looking at and can start as low as $50,000 USD which is very attractive for positive return,” said Yolley. 

Investors are turning to the U.S. in order to continue making a profit even outside of their day jobs or even in retirement. 

“I have a client in the U.S. who bought a residential property for $100,000 USD and is getting 50% monthly,” said Yolley, showing how a good, smart investment is a great way to earn. 


What is the Foreign Investment Real Property Tax Act (FIRPTA) and how does it operate? 

Before any foreign investor gets into U.S. residential property investment, they have to understand the Foreign Investment Real Property Tax Act (FIRPTA for short). Yolley explains that it is a federal tax law that ensures that foreign sellers pay income tax on the sale of real property in the U.S.

“The major purpose was to establish equity in the tax treatment between domestic and foreign investors,” said Yolley. 

It’s highly recommended that you work with a tax agent when it comes to foreign investment in the U.S. Doing so helps you better understand how much your taxes are and when they’re due. They can also guide you with the percentages that you need to withhold when it comes to purchases. Because these guidelines have been around for a long time (with a small shift in percentages in February 2016), a U.S. tax agent would have the best understanding of how to go about it and is most familiar with the process. 

“When you sell the property, the purchaser of the U.S. residential property is obligated to withhold 15%. When you’re working with a tax agent, it’s a requirement by the IRS to withhold that percentage and that must be sent to the IRS within 20 days,” said Yolley.

When that payment isn’t settled within the 20-day deadline, a penalty (with interest) will be imposed on the investor or purchaser and they must pay that penalty on top of the 15%. 


What methods are there to pay taxes in the U.S.?

When it comes to how people can pay these taxes, there are several different methods they can choose from depending on if they have contacts in the U.S., have a U.S. bank account, etc. This is one of the most frequently asked questions we get, especially when an investor is still fear-frozen.

The most common methods of paying are:

  1. Automatic payment – This method is easy, quick, and effective but you need a U.S. bank that’s online.
  2. Checks/money order – Given that the IRS is still accepting checks, this is a viable payment option.
  3. Debit/credit cards
  4. Same day wire if your preferred bank provides that service
  5. EFTPS (Electronic Federal Tax Payment System) – An online system that has a check and balance system that requires a U.S. bank account (this is the most used method).

Depending on your situation and your set-up as a client, you may prefer to use an online payment system or a check system. If you have a U.S. bank account, the automatic payment or the EFTPS may be a good option. If you have no contacts in the U.S., checks are still a good way to pay.

“I encourage getting a U.S, bank account because life becomes so much simpler, especially if there are pending transactions that are time-sensitive,” Yolley recommended.

When asked whether or not it’s difficult to open up a U.S. bank account, Yolley responded with, “Yes and no. It’s easy if you have a contact person in the U.S. Let’s say you have no family there but a trusted property manager, they can open up the account under the LLC’s name. They have control of the account—but that’s where the risk comes into play. 

“It’s important to make use of a double signatory method to minimise that risk. Being in Australia and with your partner in the U.S., there can be a situation where it doesn’t work out so well. You have to trust the person that’s there, yes, but also a two-signatory account set up so no one can act individually.”

There have also been numerous post-COVID agencies that are facilitating those payments and those could be another element where people can make use of a third party to make a payment to the U.S.


Why you should invest in the U.S.

Overcoming that “fear-frozen” state to invest isn’t impossible, especially when equipped with the knowledge on U.S. tax implications. Yolley Thomas-Kalos, whose expertise we treasure, even encourages it. 

“It’s a great time to invest in the U.S. – don’t squander the opportunity,” she said.

The residential market is booming post-COVID because more and more people are looking to purchase homes, making demand skyrocket. People are moving out of big cities and cramped apartments to be in more spacious areas, making investment a smart decision. 

“My best advice: Location is very important. Ask yourself: What is favourable for that particular state? What are the properties’ value there and how quickly do they appreciate? Remember that not every state requires a tax return and definitely do research on the state you want to buy in and the laws involved,” Yolley said.

U.S. residential property is a hot market right now and each state is different. But as long as you gain a better grasp of the tax implications of each state, understand when and how you make your payments, and follow the advice of seasoned financial and accounting professionals like Yolley, you can make a profit investing, too.

If you want to begin earning solid returns through investment, book a time with us