Discussion:Foreign Property Purchase
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Will "the tax guy" (talk|edits) said: | 5 December 2006 |
| I am working with a client who is considering purchasing property in another country which will be used as rental property for the first few years then possibly as a residence when they retire. What pros/cons should I advise them of regarding the tax treatment of such property? I am under the impression that we can treat it as though it is a rental property, giving them credit for all expenses, interest, and foreign taxes paid as long as they do not use it as a residence? Please help! | |
Michaelstar (talk|edits) said: | 5 December 2006 |
| You are correct in your conclusions. Just treat this on Schedule E as a rental. Technically, you will need to convert the monthly income and expenses at the going rate and not use the currency rate as of 12/31.
The t/p will need to file annual returns in the country where the property is but I advise you to have your client have someone from that country prep the returns. They should be able to get referrals from the attorney/agent they used to purchase the property. | |
| 5 December 2006 | |
| Also, there could be "nexus" creating activities in the country that the property is held in. Depending on this nexus standard, then income from the transactions could be taxed in both countries and treaty benefits will need to be applied to offset foreign taxes paid. They could be deemed to operate a "business" in that country due to the real estate leasing.
In the US, if you own tangible personal property for lease, then that can be nexus in the US and many individual states. In foreign countries, this could be the same... | |
| 5 December 2006 | |
| You'll also need to consider if this is a QBU and estate taxes in the country of purchase plus the US. If they are retiring to a foreign country they need tax advice in that country now. | |
| 6 December 2006 | |
| And let's bit forget: Don't forget foreign property is 40 yr ADS, not 27.5 yr MACRS. | |
| 6 December 2006 | |
| The realtor should be able to help your client connect with local tax professionals who will prepare local income tax returns as required. | |
Will "the tax guy" (talk|edits) said: | 7 February 2007 |
| Update on this client. The property is not going to be built until 2008 but they paid a down payment in 2006 plus wire transfer fees, filing fees, ect. From my minimal knowledge they cannot deduct any of these expenses in 2006 or am I missing something? | |
| 7 February 2007 | |
| Will, you should note that if the individual remains a resident of the U.S. and has borrowed funds from a foreign bank, then the interest paid will be U.S. source interest. U.S. source interest paid to a foreign person is subject to a 30% withholding tax (unless the rate is reduced by treaty). Your client may have an obligation to withhold tax at 30% and remit the tax to the U.S. government. | |
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