A Brief Tax Review
In recent years we are witnessing a growing trend of both domestic and international investors looking to invest in the US real estate market. Investments are being made in commercial properties such as shopping centers, multi-family apartment complexes, office buildings and industrial properties as well as residential properties such as single-family homes, condos and co-ops.
Investments in Real Estate properties are subject to taxation both by the relevant state and federal government. International investors may also be subject to taxation by their home country and it is advisable to check the implication of any such taxes. Most countries have tax treaties with the US in order to avoid double taxation situations yet it may be required to pay additional taxes to fulfill a different tax rate prevailing in any specific country.
The purpose of this review is to provide some preliminary information and shed some light on the tax implication of investment in the US real estate market.
This review does not constitute an advice nor a recommendation and as such should not be relied upon. The review does not intend to cover all the various issues that may arise with respect to real estate investments and does not replace any personal consultation with tax experts such as tax advisors, CPAs, tax attorneys, etc. We strongly recommend receipt of personal advice from relevant professionals.
Individuals as well as corporations are subject to taxation levied by the American Government, although the tax method as well as tax rates are somewhat different for Individuals and Corporations. Generally speaking, an individual is taxed on different sources of income from real estate properties such as rent and capital gains from sale of assets.
When an international investor produces income from US real estate properties, the source country, namely the US, has the first right for taxing such income. Nevertheless, many countries have tax treaties with the US in order to prevent a situation of being taxed again by the country in which they reside, hence avoid double taxation. Usually, the residence country will ask an investor to pay additional tax in order to complete the tax to the prevailing tax rate in that country if such a tax is higher than the tax rate levied by the US authorities.
State Taxes differ between the different states, some states do not impose taxes, some impose taxes on corporations but not on individuals, some differentiate based on the income source and other impose taxes on both corporations and individuals. Some states have a fixed tax rate while others use progressive tax rates. Moreover, some counties or cities may impose an additional tax on income produced in their jurisdictions.
The following table provides examples for State tax rates in selected states.
|Colorado||Fixed 4.63%||California||1.00% to 10.30%|
|Utah||Fixed 5.00%||Georgia||1.00% to 6.00%|
|Massachusetts||Fixed 5.30%||New York||4.00% to 8.97%|
|Alaska||Fixed 0.00%||North Carolina||6.00% to 7.75%|
|Texas||Fixed 0.00%||Arizona||2.59% to 4.54%|
Note: In Georgia, the average tax rate ranks 40 amongst the states. Oregon’s tax rates rank first (highest rate) while the last State is Wyoming where no tax is imposed at all.
Average State Tax
|Alabama4%||AlaskaNo Income Tax||Arizona3.52%||Arkansas4.08%||California5.8%|
|Colorado4.63%||Connecticut4.83%||Delaware4.77%||District of Columbia6.86%||FloridaNo Income Tax|
|Missouri3.75%||Montana3.99%||Nebraska4.52%||NevadaNo Income Tax||New Hampshire5%|
|New Jersey4.59%||New Mexico3.63%||New York6.19%||North Carolina6.92%||North Dakota3.67%|
|South Carolina4.17%||South DakotaNo Income Tax||Tennessee6%||TexasNo Income Tax||Utah5%|
|Vermont7.18%||Virginia3.94%||WashingtonNo Income Tax||West Virginia4.8%||Wisconsin6.35%|
|WyomingNo Income Tax|
Despite any tax treaties that may exist between the US and other countries, there may be situations where while the US treats income produced from sale of properties as an ordinary marginal income, other countries may regard it as a capital gain and treat it differently in its tax regime. Nevertheless, most tax treaties provide solutions to prevent double taxation of the same income.
For example, the type of transactions Logical is engaged in would usually be taxed on a progressive income tax basis in the US, while in Israel they are entitled to be regarded as capital gains.
Estate tax – US levies taxes on ones estate regardless of residency. While most US residents are entitled to significant reliefs via an exemption from estate tax for up to about $5M of estate value, foreign investors cannot enjoy this benefit and are only entitled for a relief of about $60K. It is therefore advisable to consult with professional tax advisors in order to reduce or eliminate the exposure to such tax using the appropriate investment structure that matches the objectives and need of the investor.
To conclude, it is strongly advisable to seek professional advice and receive the right guidance when deciding to invest in real estate in order to maximize tax efficiency.
Contact us today! The investment process is composed of several stages, where the first steps can take several weeks. Therefore we recommend contacting us as soon as possible in order to be ready for investing when an identified project is due to begin.