What should non-resident property owners know about U.S. property taxes?
Published on December 01, 2023
by Jonathan Rose, EA
Jonathan Rose, an IRS Enrolled Agent with 12 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in Australia.
Jonathan also talked about family tax benefits in Australia.
Table of Contents
What are non-resident property taxes?
Non-resident property taxes are levied on real estate owned in the U.S. by individuals who don’t reside within the country. These taxes are essential to consider, especially if you’re planning to maintain ownership of property in the U.S. while living abroad.
Here are the key aspects to consider:
- Local Rates and Assessments: Property tax rates are set locally, so they can differ greatly. It’s important to check the specific rates in the area where your property is.
- Rental Income Taxation: If you’re earning rental income from your U.S. property, you’re required to pay income tax on this income. This means filing tax returns in the U.S. and potentially paying federal income tax on the rental income.
- Estate Tax Implications: For non-resident, non-citizen property owners, U.S. estate taxes can apply to U.S.-situated assets, including real estate, upon their death.
- Potential Deductions: You might be eligible for certain deductions against your U.S. tax liability, such as property tax payments and mortgage interest.
- Reporting Requirements: If you’re renting out your property, you must report this income and any related expenses on a U.S. tax return.
Who qualifies as a non-resident property owner?
To qualify as a non-resident property owner in the U.S., you must not be a U.S. citizen and also fail to meet the criteria set by either the green card test or the substantial presence test for the calendar year.
Essentially, if you do not have a green card and have not been physically present in the U.S. for a sufficient amount of time, as defined by these tests, you are considered a non-resident for tax purposes. This status is crucial in determining your tax obligations and liabilities in the U.S., especially when it comes to owning property.
Non-resident property owners are subject to specific tax rules and regulations that differ from those applied to U.S. citizens or resident aliens. A tax professional can help you understand these distinctions, allowing you to ensure compliance with U.S. tax laws and avoid potential legal and financial complications.
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How is property tax calculated for non-residents?
- Flat Tax Rate: Income from real property in the U.S. owned by non-resident aliens is generally taxed at a flat rate of 30%. This rate applies unless the income is effectively connected with a U.S. trade or business.
- Special Election Option: Non-resident aliens can choose to treat their income from U.S. real property as effectively connected with a U.S. trade or business. This election allows them to claim deductions related to the property and have their net income taxed at graduated rates.
- Election Criteria: To make this election, non-resident aliens must not have their income otherwise connected with a U.S. trade or business. The election applies to all income from real property in the U.S. held for income production, including rents, royalties, and gains from sales.
- Filing Requirements: The election is made by attaching a statement to the tax return for the year of the election. This includes details about the property and income from it.
- Revoking the Election: This election can be revoked by filing an amended tax return, subject to certain time limits and conditions.
What are the filing requirements for non-resident property taxes?
Non-resident property owners typically file Form 1040-NR, U.S. Nonresident Alien Income Tax Return. This form is used to report income from U.S. sources, including rental income from property.
Additionally, the key deadline for non-residents is April 15th for income earned in the previous year. If you’re filing a return solely to claim a refund, the deadline extends to June 15th. However, if you owe taxes, it’s crucial to file by April 15th to avoid penalties.
Depending on the location of your property, you may also need to file state tax returns. Each state has its own rules and deadlines, so it’s important to check the specific requirements of the state where your property is located.
Remember, tax laws can be complex, and they change frequently. It’s always a good idea to consult with a tax professional who can provide advice tailored to your specific situation. They can help ensure you meet all your tax obligations and ensure you don’t incur any penalties.
Can non-residents claim tax credits or deductions?
Yes, they can; depending on your situation and other factors.
- Deductions: If you’ve elected to treat your rental income as effectively connected with a U.S. trade or business, you’re allowed to deduct expenses related to the property. These can include mortgage interest, property taxes, maintenance costs, and depreciation.
- Tax Credits: Generally, non-residents are not eligible for most tax credits offered to U.S. residents. However, there might be exceptions based on specific circumstances or tax treaties between the U.S. and your country of residence.
- Tax Treaties: The U.S. has income tax treaties with many countries, which can affect your tax liabilities. These treaties sometimes provide for reduced tax rates or specific exemptions.
What happens if non-residents miss property tax payments?
Firstly, you’re likely to face late fees and penalties. These fees can vary depending on where your property is located. The IRS may also impose additional penalties and interest on the unpaid taxes.
In more severe cases, missing these payments can result in a lien being placed on your property. This is a legal claim against your property for the unpaid tax debt, essentially giving the government a stake in your property equal to the amount owed.
If you find yourself in this situation, it’s important to address it promptly by consulting with a tax professional. They can offer expert advice tailored to your specific situation, assist in negotiating with tax authorities, and help you understand the complexities of tax laws for non-residents. A tax professional can also guide you through the process of rectifying missed payments and advise on how to avoid similar issues in the future.
Are non-resident property owners subject to double taxation?
Non-resident property owners in the United States may face double taxation, but this largely depends on the tax treaties between the U.S. and their country of residence. Owning property in the U.S. as a non-resident can lead to tax obligations both in the United States and in the country where the individual resides. However, the impact of double taxation is often mitigated by international tax treaties.
The U.S. has established tax treaties with many countries to prevent the same income from being taxed twice. These agreements are crucial for non-residents who own property in the U.S., as they can provide relief through tax credits, exemptions, or deductions. The specific terms of these treaties vary, affecting how property income is taxed and what relief measures are available.
For example, if a non-resident property owner is taxed on rental income from their U.S. property in both the United States and their home country, the tax treaty may allow them to claim a credit on their U.S. tax return for the taxes paid abroad. This credit can significantly reduce their tax liability in the U.S.
Non-resident property owners are strongly advised to seek guidance from a tax professional. An expert in international taxation can help navigate the specific provisions of relevant tax treaties, ensuring compliance with all tax laws and maximizing any benefits available under these agreements. Consulting a tax professional is a key step in effectively managing tax obligations and avoiding unnecessary tax burdens as a non-resident property owner in the U.S.
The information provided herein is for general informational purposes only and should not be considered professional advice. While we aim to provide helpful and accurate information, we make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained here or linked to from this material.
Always get professional advice from a US international tax specialist.
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