KNOWLEDGE BASE

PROPERTY OWNERSHIP

Buying a Property in the USA

Introduction Capital Gains Exemptions Succession Laws and Inheritance Tax

INTRODUCTION

Owner Occupier home ownership in the United States of America has risen from 48% to 64% since the Second World War. This is entirely due to a real increase in incomes, preference for suburban living, the availability of credit and the opportunity for equity accumulation and capital gains associated with property investment.

Foreign ownership of United States real estate has grown dramatically since the early 1980’s particularly on the Eastern Seaboard and Florida. It is important, however, that consideration should always be given to the method and route of ownership to avoid or to mitigate the impact of capital gains tax, estates taxes and double taxation.

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CAPITAL GAINS TAX

In the United States individuals and corporations pay income tax on the net total of all their capital gains. The tax rate for “long term capital gains” i.e. assets that had been held for more than one year prior to sale was reduced in 2003 to 15% and to 5% for individuals in the lower income tax brackets. Short term capital gains are taxed at a higher rate, the ordinary tax rate. In 2013 the reduced long term tax rates will be governed by a “sunset” clause and will revert back to the rates in effect in 2003, which were 20%.

Assessment for capital gains is calculated on a “cost basis” to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for improvements, fees and depreciation.

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EXEMPTIONS

  • Every two years, an individual can exclude up to US$250,000 (US$500,000 for married couples) of gains on the sale of their primary residence.

  • If an individual or corporation realises both capital gains and capital loss in the same year, the losses cancel out the gains in the calculation of taxable gains.

Real estate transactions are entirely governed by state law. Unlike many other foreign countries, the United States does not impose significant restrictions on the ownership of real estate by foreigners. One main difference however is in the manner in which capital gains tax is collected. U.S. citizens and residents ordinarily report capital gains in their tax returns. Non-resident aliens, however, pay a percentage of the sale proceeds to the U.S. Internal Revenue Service and then subsequently file accounts relating to the property in order to claim any refund that may be due.

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SUCCESSION LAWS AND INHERITANCE TAX

A non resident alien person of the United States is potentially subject to U.S. estate tax if he dies whilst directly owning U.S property including real estate, equities and bonds etc. The concern for foreigners is that whilst resident owners of U.S. property enjoy an exemption of between US$1,000,000 and US$3,500,000 (2009) non resident alien persons can only benefit from an exemption of US$60,000. The current rates of Federal estate tax range from between 18% and 55%. Therefore secondary homes owned by non resident aliens can often be subject to estate tax. In addition to this, relief between spouses is only granted if the surviving spouse is a United States citizen. For example, where a U.S. property is owned directly by a married couple who are non U.S. citizens and are ordinarily resident in a European Country and where one of the spouses dies, there would be a liability to federal estate tax based on the property’s market value. In the case of a property worth US$500,000 the liability would be approximately US$150,000.

Many foreigners of the United States are not familiar with the various laws relating to estate taxes and should be aware that if ownership is structured properly through a non U.S. corporation, trust or foundation, the liability to U.S. estate taxes can be legally avoided.

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CONTACT A CONSULTANT

A bespoke 'offshore' solution can be complex and requires careful planning and execution. We therefore encourage our clients to contact us directly, without obligation.

While all of our consultants in our offices provide a Free Initial Consultation, the consultants listed below have particular expertise in this area and will gladly assist with advice on how to approach your unique challenge.

Alternatively, to select one of our multilingual offices, click here for a list of our office contact details or click on the button below and request that a consultant calls you back.

REQUEST A CALLBACK

Michael Clifford, FInstAM MIoD (Managing Director)
LONDON OFFICE
Tel: 
Mobile: 
+44 0 20 7317 0600
+44 0 77 6522 3353
Email: mclifford@ocra.co.uk
Bart Dekker, LLM (Group Managing Director Asia)
HONG KONG OFFICE
Tel: 
Fax: 
+852 2522 0172
+852 2522 4720
Email: hongkong@ocra.com.hk
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