When it comes to foreign investors purchasing properties on US soil, the number has increased over the years, thanks to the relatively low property values and high expectations for returns. However, there are some differences between US and foreign investors when it comes to the management of their properties. This is mainly because of the tax rules that apply and other subtle differences as well.
It will be important to understand the differences because they fall under IRS tax law and real estate transactions. It will be vital to have a full understanding of the appropriate laws, rules and regulations so that there will be no misunderstandings on how such property management will work with a foreign investor. Therefore, it is not surprising that a large percentage of foreign investors use agents and companies that have such experience.
Use of Professional Property Managers
There has been a noticeable uptick in the number of properties purchased by foreign investors in recent years, particularly those from China who have made a considerable investment in many real estate properties in terms of commercial and residential structures. The majority of these purchases has been made in Five states, Arizona, California, Florida, Texas and NY.
A substantial portion of the investors is hiring a professional property manager to actually oversee their purchases. There are a number of advantages for foreign investors as the properties purchased are not their primary residence and many actually reside in their own countries and are unable to give their properties the oversight that they could provide. So, it is not surprising that property management companies are doing the oversight of them.
How the Rental Income is Taxed
Before the final agreement is made to purchase a cash-flow property, the foreign investor and realtor will need to discuss whether the rental income that is collected will be taxed as investment income through withholding or as a net-based income such as with a US trade or business without any withholding. No matter who gets the rental income, it will be subject to US taxes regardless of the tax status of the investor or even the treaties that exist between the US and the country where the foreign investor is located.
The rental income is subject to a 30% withholding tax that is applied to the gross amount and not the net that is received. So, this means that all the operating expenses must be included as part of the withholding tax. However, if the property is commercial in nature such as owning a shopping mall for example, then the income derived from rent will not be subject to any withholding tax and instead use a progressive rating system. All expenses related to the rental income in this case can be deducted and the foreign investor must make estimated tax payments based for what is due on the income itself.
Whichever way the rental income in handled in terms of managing their properties, the foreign investor will continue to purchase US commercial and residential properties as long as the market remains growing and opportunities abound.