International Business Tax
TAX ISSUES IMPACTING NON-RESIDENT ALIENS WHO OWN U.S. PROPERTY
Non-resident aliens, people who are not U.S. citizens and do not reside in the U.S., often do not receive as favorable estate and gift tax treatment as U.S. citizens and residents. For example, a non-resident alien is often subjected to U.S. estate and gift taxes when acquiring U.S. property when a U.S. citizen or resident would not. For example, when a non-resident alien buys property such as an apartment building or home for their college-aged son or daughter, and the title is in their individual name, they could be subjected to significant estate taxes when they pass away. Likewise, they could be subjected to significant gift taxes if they give the property away prior to death.
The difference in estate and gift taxes between a U.S. citizen or resident and a non-resident alien is dramatic. Non-resident aliens receive only a $60,000 estate tax exemption and any property valued over that amount will be taxed up to 40% at their time of passing. (This $60,000 exemption does not apply to gifts prior to death.) In contrast, in 2019, U.S. citizens and residents will only be taxed on estates or gifts in excess of 11.4 million dollars for single individuals or 22.8 million dollars for married couples. Thus, if a home valued at 1.5 million dollars is purchased and the owner passes away, a U.S. citizen or resident will pay no estate tax on this property, while a non-resident alien may pay estate taxes up to $576,000.
There are, however, steps that a non-resident alien can take to reduce their estate and gift tax exposure when they own U.S. property. Real estate purchases, for example, can be made in the name of a foreign business entity or a U.S. entity owned by a foreign entity. In such circumstances, estate and gift taxes can be avoided entirely. If U.S. properties have already been purchased in an individual name, it is possible to make changes in title that will avoid or reduce exposure to estate and gift taxes.
The amount of estate and gift tax exposure also depends on the country of origin of the non-resident alien. Specifically, the estate and gift tax exposure depends on whether an estate and gift tax treaty is in effect between the U.S. and the non-resident alien’s country of origin. Currently 16 countries hold estate and gift tax treaties with the U.S. and these treaties can largely reduce a non-resident alien’s U.S. estate and gift tax exposure on their U.S. property. By simply structuring investments in the appropriate way, estate and gift taxes can be removed or eliminated. While this is a complex process, the key strategy is to ensure a non-resident alien does not own U.S. property in his or her own name.
Kevin J. Moore and Associates can structure purchases to create an overall tax efficient transaction which includes estate and gift tax planning along with income tax planning. Please give our office a call today if you have any questions about tax planning and estate & gift taxes.