U.S. Income Tax Concerns with Regard to Foreign Investment in the U.S.: U.S. Real Property Interests

In Braverman Sachs Group Newsletter, Market Report / Fall 2011


A. Introduction

My article in the May 2011 Newsletter provided an overview of the U.S.’s income tax jurisdiction over the foreign investor. In that article, I mentioned that the U.S. may tax a U.S. Person on his worldwide income. Nevertheless, the U.S. generally will tax the foreign investor, a nonresident alien (an individual who is neither a U.S. Citizen nor U.S. Resident), only on certain of his U.S. source income. One type of U.S. source income is income upon disposition of a U.S. Real Property Interest (“USRPI”). This article will address the U.S. income tax consequences of a disposition of an individual foreign investor’s USRPI. Note that it neither addresses any other taxes, nor does it address the effects of treaties or foreign laws, which may affect the foreign investor’s tax liability either in the U.S. or in another country.


B. What is a USRPI?

A USRPI is either:
1) A direct interest in real property that is located in the U.S. or the Virgin Islands; or
2) An interest (other than an interest solely as a creditor) in a U.S. corporation that is characterized as a U.S. Real Property Holding Corporation (“USRPHC”).

A USRPHC is any corporation in which the fair market value of its USRPIs equals or exceeds the sum of the fair market value of (i) its interests in real property located outside the United States plus (ii) any of the corporation’s assets used or held for use in a trade or business.


C. Taxation of U.S. Source Capital Gains

In general, the U.S. does not tax the foreign investor’s capital gain on the disposition of U.S. property unless the capital gain is effectively connected with the foreign investor’s U.S. trade or business (“ECI”). Capital gain that is ECI is taxed at U.S. individual income tax rates.


D. Taxation of Capital Gains from a USRPI

The capital gain from a USRPI is treated as ECI, and thus it is taxed at U.S. individual income tax rates. In general, the person to whom the foreign investor is selling or exchanging the USRPI must deduct and withhold 10 percent of the amount realized on the disposition of the USRPI. He also must report the transfer to the Internal Revenue Service.


* This article provides legal and tax information, but neither tax nor legal advice. I encourage the foreign investor to discuss his specific issues with Florida attorneys and accountants and with attorneys and accountants in any other jurisdiction to which the foreign investor is connected.
** To ensure compliance with requirements imposed by the IRS under Circular 230, Rumbak Law, P.A., informs you that any U.S. federal tax advice contained in this document, if any, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.
Neil Rumbak and Rumbak Law, P.A., are not affiliated with Better Homes and Gardens Real Estate.

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