These are the 5 topics I share with you in this publication:
1. Flipping vs Long-Term Capital Gain
2. Easing Global Taxes: Reducing Tax Burdens For Non-Resident Taxpayers
3. Why Did I Have to Get Up at 02:00 a.m.?
4. What Should Taxpayers With Extensions Consider When Preparing To File Their Tax Returns?
5. Advantages of Real Estate Investment in the United States for Non-Resident Foreigners
1 - Flipping vs Long-Term Capital Gain
What is the capital gains tax?
The capital gains tax is applied to the profit obtained from selling an asset that was purchased at a lower price. This tax affects almost all assets we own, such as properties, stocks, bonds, precious metals, etc.
The rate of the capital gains tax depends on various factors, such as the type and source of income, the holding period of the asset, the taxpayer's country of residence, and the existence of tax treaties that may reduce or eliminate taxation.
In the United States, the capital gains tax varies depending on whether it is short-term or long-term gain.
Short-term gains are those obtained from selling an asset held for one year or less and are taxed at ordinary income tax rates, which can go up to 37%.
Long-term gains are those obtained from selling an asset held for more than one year and are taxed at the following rates:
0% for taxpayers with incomes below $40,400 (single) or $80,800 (married filing jointly).
15% for taxpayers with incomes between $40,400 and $445,850 (single) or between $80,800 and $501,600 (married filing jointly).
20% for taxpayers with incomes above $445,850 (single) or $501,600 (married filing jointly).
Additionally, in some cases, an additional 3.8% tax may apply to capital gains derived from investments, known as the Net Investment Income Tax (NIIT).
There are some exemptions or reductions for the capital gains tax, for example, on the sale of a primary residence, on reinvestment in another asset, or through the application of tax treaties. These tax benefits depend on the specific conditions of each case and require compliance with certain requirements and formalities.
It is important to understand how the capital gains tax works and to plan operations that generate this type of income adequately to avoid unpleasant surprises and optimize the tax burden.
What is the difference in tax rates between long-term capital gains and gains from speculating with real estate in the United States?
The tax rates for long-term capital gains and gains from speculating with real estate in the United States are different. Gains from speculating with real estate involve buying a property with the intention of quickly reselling it to make a profit. In this context, the term "speculating" denotes the idea of buying and selling rapidly with the goal of making money.
The tax rates for long-term capital gains are usually lower than the rates for ordinary income and apply to assets held for more than one year. Generally, the rates range from 0%, 15%, or 20%, depending on your taxable income.
In contrast, gains from speculating with real estate are considered ordinary income and are subject to regular income tax rates, which can be higher than the rates for long-term capital gains. When speculating with real estate, you acquire a property and quickly sell it to make a profit, and that profit is taxed as ordinary income.
To better understand the difference in tax payments, let's look at a detailed example of two properties sold in the long term under different scenarios:
Property A: Purchased with the intention of speculating. When acquiring Property A, you plan to resell it quickly to make a profit. After six months, you sell it for $200,000 more than what you originally paid for it.
Property B: Purchased as a long-term investment. Instead, when acquiring Property B, your goal is to hold it as a long-term investment. After holding it for five years, you sell it for the same amount, which is $200,000 more than the initial purchase price.
Property A (speculation): The $200,000 gain is considered ordinary income and will be subject to regular income tax rates, which could be significantly higher than the rates for long-term capital gains. As a result, a substantial portion of the gain will go towards paying taxes.
Property B (long-term investment): The $200,000 gain is considered a long-term capital gain, and the corresponding tax rate will be applied, which is usually lower. This means you will pay less tax on the same amount of gain compared to speculating with Property A.
It is important to note that tax laws and rates can change over time, so it is always essential to consult with a tax professional or check the latest IRS guidelines for the most up-to-date information on capital gains tax and real estate transactions.
But if the sale of a house with the intention of speculating takes more than 12 months, will it be considered ordinary income or long-term capital gains?
If the sale of a house takes more than 12 months, the tax treatment will depend on the specific circumstances and your intention when purchasing the property. If the property was originally bought with the intention of selling it for a quick profit, then the gains from the sale would still be considered ordinary income, even if the holding period exceeds 12 months.
The determination of whether the gains are treated as ordinary income or long-term capital gains is based on the intent and purpose of the purchase. If the property was acquired as an investment with the intention of holding it for a longer period and then selling it, the gains could qualify for long-term capital gains tax rates.
2 - Easing Global Taxes: Reducing Tax Burdens For Non-Resident Taxpayers
Non-resident taxpayers in the United States who earn income from that country must comply with certain tax obligations, depending on the type and source of their income. In this instance, we will focus on a specific type of income that is common for many entrepreneurs operating in the U.S. - these are fixed, determinable, annual, or periodical incomes (FDAP).
(Note: FDAP refers to income types that are subject to withholding tax, such as dividends, interest, rents, and certain royalties, when paid to non-resident taxpayers.)
What are FDAP (Fixed, Determinable, Annual, or Periodical) income exactly?
FDAP income refers to payments made in known amounts in advance or that can be calculated based on certain criteria. These incomes can be periodic, meaning they are paid from time to time, but not necessarily on an annual or regular interval.
Some examples of FDAP income are:
Compensation for personal services (such as commissions and gross proceeds from performances)
Original issue discount
Pensions and annuities
Real estate income, such as rents, that is not from the sale of real property
Scholarships and grants
Other subsidies, awards, and prizes
These incomes are considered FDAP only if they originate from U.S. sources, meaning they arise from activities conducted or property located within the U.S.
How are FDAP incomes taxed?
FDAP income that is not effectively connected with a trade or business in the U.S. is subject to a 30% withholding tax on the gross amount paid to the non-resident taxpayer. This withholding is applied regardless of whether the taxpayer has deductible expenses related to that income.
The 30% rate can be reduced or eliminated if there is a tax treaty between the U.S. and the taxpayer's country of residence that establishes such provisions. Tax treaties are bilateral agreements aimed at avoiding double taxation and promoting trade and investment between the parties.
To claim the benefit of a tax treaty, the non-resident taxpayer must submit Form W-8BEN, Certificate of Foreign Status for United States Tax Withholding and Reporting, to the person or entity paying them FDAP income. This form must indicate the taxpayer's country of residence, the type and source of the income, and the applicable treaty rate.
What tax treaties exist between the U.S. and other countries?
The U.S. has active tax treaties with more than 60 countries, including Spain, Mexico, Chile, Peru, and Panama. These treaties establish different rates for different types of FDAP income, depending on the country and the taxpayer's circumstances.
The treaty between the U.S. and Spain establishes that dividends paid by a U.S. company to a Spanish resident are subject to a 15% withholding tax, unless the beneficial owner is a company that directly owns at least 80% of the voting power of the paying company for a 12-month period before the payment, in which case the withholding tax will be 10%.
Interest paid by a U.S. source to a Spanish resident is exempt from withholding, except for contingent interest or interest paid by a hybrid entity. Royalties paid by a U.S. source to a Spanish resident are subject to a 10% withholding tax, unless they are royalties for the use or right to use industrial, commercial, or scientific equipment, in which case the withholding tax will be 5%.
What examples can be given of FDAP income for entrepreneurs?
FDAP income can come from various business activities involving the use or exploitation of goods or services in the U.S.
Some examples are:
A Spanish entrepreneur who owns a corporation in their country and receives dividends from a U.S. company in which they own 10% of the shares. These dividends are subject to a 15% withholding tax under the treaty between the U.S. and Spain.
A Mexican entrepreneur who owns an LLC in their country and provides consulting services to U.S. clients. These services are considered FDAP income if performed or used in the U.S., and they are subject to a withholding tax of 30%, unless the entrepreneur can demonstrate that the services were provided from Mexico.
A Chilean entrepreneur who owns a corporation in their country and receives royalties for the use of a patent registered in the U.S. These royalties are subject to a 10% withholding tax according to the treaty between the U.S. and Chile.
How can I reduce my tax burden on FDAP income?
In addition to claiming the benefit of tax treaties whenever possible, there are other strategies that can help reduce the tax burden on FDAP income for non-resident taxpayers in the U.S.
Some of them include:
Choosing the most suitable legal form for operating in the U.S., taking into account the tax and legal implications of each option.
Properly planning the sources and uses of funds generated by business activities in the U.S., seeking to optimize cash flow and minimize exposure to capital gains tax.
Regularly reviewing compliance with tax obligations in the U.S., avoiding penalties and interest for late filing or insufficient tax payment.
Seeking specialized professional advice on international tax matters, which can provide guidance and support to address doubts and seize opportunities.
In summary, FDAP income is a type of income from the U.S. that may be subject to a 30% withholding tax on the gross amount paid to the non-resident taxpayer, unless there is a tax treaty establishing a lower rate or an exemption.
Non-resident taxpayers in the U.S. receiving FDAP income must be familiar with the rules applicable to their specific situation, as well as the strategies that can help reduce their tax burden.
FDAP income can come from various business activities involving the use or exploitation of goods or services in the U.S., such as personal services, dividends, interests, royalties, among others.
These incomes can represent a business opportunity for entrepreneurs who want to expand their markets and generate added value. However, they also involve a tax responsibility that must be addressed with diligence and professionalism to avoid issues with U.S. tax authorities and take advantage of the benefits of existing tax treaties.
3 - Why Did I Have to Get Up at 02:00 a.m.?
I recorded this video at 05:00 a.m. while at the airport with my wife and daughter on our way to Punta Cana, Dominican Republic, for a one-week vacation.
We had to wake up at 02:00 a.m. because we had to leave the house at 03:00 a.m. to arrive at Fort Lauderdale airport by 04:00 a.m., as our flight was departing at 06:00 a.m.
Let me tell you that my wife loves waking up at 07:30 a.m., and while talking to her during the early morning wait, I started thinking about the following:
Imagine if you did the same, waking up at 04:00 a.m. every day to achieve your goals and dreams, as if it were a vacation trip...
How far would you go? Would you achieve your goals? Do you really know what you want in your life?
The reason I wake up at 04:00 a.m. every day, as if it were a vacation trip, is because I know exactly what I want in my life.
Watch my video on YouTube
4 - What Should Taxpayers With Extensions Consider When Preparing To File Their Tax Returns?
Many individuals requested an extension to file their tax returns after the regular April deadline. They have until October 16, 2023, to complete and submit their returns.
The IRS suggests that those who already have the forms and information they need should file now - there is no advantage in waiting until the end of the extension period, and filing now saves the worry of possibly missing the deadline.
What taxpayers with extensions should know as they prepare to file:
1. File the return before the deadline
Individuals with extensions should file and pay any owed balance by Monday, October 16, 2023.
2. They can use IRS Free File
Many taxpayers can electronically file their tax returns for free through the IRS Free File program. The program is available on IRS.gov until October 16. Electronic filing is easy and secure, and it is the most accurate way for individuals to file their taxes. This resource can also help taxpayers determine their eligibility for many valuable tax credits.
3. Taxpayers get their refund faster if they choose direct deposit
Anyone owed a refund should request direct deposit to have their tax refund electronically deposited into their financial account.
The fastest and safest way to get your tax refund is by electronically depositing it for free into your financial account. The IRS program for this is called direct deposit. You can use it to deposit your refund into one, two, or even three accounts. Even if you don't have a checking account, other options are available for direct deposit. This resource is now also available for returns filed after their due date.
Direct deposit is easy to use. Just select it as your refund method through your tax software and enter the account number and routing number. Or, inform your tax preparer that you want direct deposit. You can even use direct deposit if you are one of the few people still filing a paper return. Be sure to double-check your entry to avoid errors.
Don't have a check available to find your routing and account numbers? A routing number identifies the location of the bank branch where you opened your account, and most banks list their routing numbers on their websites. Your account number can usually be found when logging into your online banking account or by calling your bank branch.
If you have a prepaid debit card, your refund may be deposited onto the card. Many reloadable prepaid cards have account and routing numbers that you can provide to the IRS. Check with your financial institution to ensure that your card can be used and to get the routing and account numbers, which may be different from the card number.
4. The IRS offers payment options for taxpayers with a balance due.
Those who owe taxes and cannot pay the balance in full should pay as much as they can to reduce interest and penalties. The IRS has options... (the text was cut off at this point).
For individuals who cannot pay their taxes, this includes requesting a payment plan on IRS.gov. Taxpayers can view payment options or check their account balance online.
What if I can't pay my taxes?
Don't panic - you may qualify for an online payment plan (including an installment agreement) that allows you to settle your outstanding balance over time. Once your online request is complete, you'll receive immediate notification if your payment plan has been approved without having to call or write to the IRS. Online payment plans are processed faster than requests submitted with electronically filed tax returns, even if the new tax hasn't been assessed yet.
Online payment plans include:
Short-term payment plan: The payment period is 120 days or less, and the total amount you owe is less than $100,000 in combined taxes, penalties, and interest.
Long-term payment plan: The payment period is longer than 120 days, and you pay in monthly installments. The total amount you owe is less than $50,000 in combined taxes, penalties, and interest.
If the IRS approves your long-term payment plan (installment agreement), an installment fee may apply depending on your income.
If you already have a payment plan, you may also qualify to use the online payment plan option to review your existing agreement. Changes you can make online include checking payment dates, amounts, and bank information for direct debit installment agreements.
5. Taxpayers who didn't file their return in April and didn't request an extension should file it as soon as possible.
Individuals who didn't request an extension before April 18th this year should file their return and pay it as soon as possible. This will prevent additional interest and penalties from accruing. There's no penalty for filing a late return for individuals owed a refund.
Taxpayers who fail to meet their tax obligations may be subject to a penalty.
The IRS imposes penalties for various reasons, including:
Not filing your tax return on time
Not paying the taxes you owe on time and in the correct manner
Not preparing an accurate return
Not providing accurate and timely filed information returns.
It is possible that interest may be charged on a penalty if it is not paid in full.
5 - Advantages of Real Estate Investment in the United States for Non-Resident Foreigners
Here, we will explain why real estate investment in the United States is an attractive and viable option for non-resident foreigners, and how you can take advantage of it to achieve your financial and personal goals.
Why invest in real estate in the United States?
There are many reasons why investing in real estate in the United States is a smart and profitable decision for non-resident foreigners. Some of them are:
Economic stability: The United States stands out as one of the strongest and most stable economies in the world. Its ability to withstand crises and maintain sustained growth makes it a secure destination for investment and capital preservation.
Diversity of markets: From the bustling streets of New York to the sunny landscapes of California, the United States offers a variety of real estate markets to meet the different investment objectives of non-resident foreigners. Whether it's acquiring residential, commercial, or vacation rental properties, there are options for every taste.
Constant and growing demand: The United States has a population of over 330 million people, with high geographic and labor mobility. This generates a constant and growing demand for housing, both for purchase and for rent, especially in urban and suburban areas with higher development and infrastructure.
Attractive profitability: Real estate prices in the United States have experienced a notable recovery after the 2008 financial crisis, but they are still accessible compared to other developed countries. Additionally, mortgage interest rates are low, facilitating financing. All of this translates into attractive profitability for investors, both through property value appreciation and rental income.
Diversity of options: The United States offers a wide variety of options for investing in real estate, from single-family homes to apartments, from commercial properties to industrial spaces. This diversity allows investors to choose properties that align with their investment strategies and goals.
Legal protections and transparency: The United States has a robust legal system that protects property rights and provides transparency in real estate transactions. Non-resident investors can have confidence in the reliability of the system and enjoy the same legal protections as domestic investors.
Tax benefits: The U.S. tax system provides various benefits for real estate investors, including deductions for mortgage interest, property taxes, and depreciation expenses. Non-resident investors can also take advantage of tax treaties that may reduce withholding taxes on rental income.
Professional real estate services: The United States has a well-established real estate industry with experienced professionals, such as real estate agents, property managers, and attorneys, who can assist non-resident investors in navigating the market and making informed decisions.
Overall, real estate investment in the United States offers non-resident foreigners a range of opportunities for capital growth, income generation, and portfolio diversification. However, before making any investment, it is essential to conduct thorough research, seek expert advice, and understand the specific regulations and tax implications that apply to non-resident investors.
from offices to commercial spaces, from land to construction projects. Each option has its advantages and disadvantages, depending on the investor's profile, budget, time horizon, and risk tolerance.
Here are two examples of real estate investment opportunities that could be attractive to non-resident foreign investors:
Residential properties in economically growing cities: Acquiring residential properties in cities with growing economies, such as Austin, Texas, or Seattle, Washington, can be an interesting option. These cities offer thriving job markets, increasing the demand for housing and, therefore, the potential for appreciation.
Vacation rental communities in tourist destinations: For those seeking additional income and the possibility of enjoying their property during certain times of the year, vacation rental communities in tourist destinations like Orlando, Florida, or Las Vegas, Nevada, can be ideal. These properties can generate steady income by renting to tourists during peak demand periods.
How to invest in real estate in the United States?
If you have been convinced of the charms of real estate investment in the United States, the next step is to know how to do it. Here are some practical tips to make your experience successful:
Define your objective and strategy: The first thing you should do is define what you want to achieve with your investment, how much money you are willing to invest, how long you plan to hold the property, and what level of risk you are willing to take. This will help you choose the option that best suits your needs and expectations.
Research the market: Once you have a clear objective and strategy, you should research the real estate market in the United States, its trends, opportunities, and risks. You can consult reliable sources of information such as the Department of Housing and Urban Development (HUD), the National Association of Realtors (NAR), or specialized portals like Zillow or Realtor. You can also contact local real estate agents who can advise and guide you.
Choose the location: Location is one of the most important factors when investing in real estate, as it determines the property's value, demand, and potential. You should choose a location with a good level of development, attractive amenities, and potential for growth. Consider factors such as proximity to schools, transportation, shopping centers, and job opportunities.
Select the property: Once you have chosen the location, you must select the property that suits you best. To do this, you must evaluate aspects such as size, design, condition, age, price, and the property's profitability. You should also verify that the property has all the necessary documents in order, such as the property title, certificate of occupancy, zoning permit, and up-to-date taxes.
Finance your investment: If you don't have enough money to buy the property outright, you can choose to finance your investment through a mortgage loan. To do this, you must meet certain requirements, such as having a good credit history, a stable and sufficient income to pay the monthly installments, a valid passport, and a valid visa (if required), and obtaining an Individual Taxpayer Identification Number (ITIN) from the IRS. Additionally, you should consider that banks often require a larger down payment for non-resident foreigners (between 25% and 50% of the property value) and charge a higher interest rate than for residents.
Manage your property: Once you have acquired your property, you must manage it properly to keep it in good condition and generate rental income. You can hire a company or a professional to handle the operational, legal, and financial aspects of your property, such as collecting rent, paying taxes and utilities, performing necessary maintenance and repairs, resolving tenant issues or complaints, etc. This will save you time, money, and headaches.
Declare your income and pay your taxes: As a non-resident foreigner investing in real estate in the United States, you must declare your income and pay the corresponding taxes to the IRS. To do this, you must file Form 1040-NR every year before April 15 (or June 15 if you reside outside the United States).
Definition of Concepts
Before making any investment, it is essential to understand some key concepts related to real estate investment in the United States, including: (proceed to provide the definitions of the relevant concepts):
Title of Property: The title of property is the legal document that certifies ownership of a real estate property. It is crucial to ensure that it is free from liens or pending debts before making a purchase.
Property Inspection: Property inspection is a fundamental step before closing any purchase agreement. A professional inspector will review the property's condition, looking for potential structural issues or necessary repairs.
Tax Strategies to Reduce Tax Burden
Non-resident foreigners should be aware that there are tax strategies that can be applied to reduce the tax burden when investing in real estate in the United States, such as:
Use of Legal Entities: Creating a legal entity, such as an LLC (Limited Liability Company), can offer tax benefits and asset protection. This can help reduce taxes and mitigate risks in case of litigation.
Deductions and Tax Benefits: Investors should take advantage of available tax deductions, such as maintenance and repair expenses of the property, mortgage interest, and depreciation, to reduce the tax burden on the income generated by the investment.
Deferred Tax Payment through a 1031 Exchange: This is a strategy that allows you to defer tax payment on the capital gain obtained from selling a property, as long as you reinvest that capital in another similar property within a specified timeframe (45 days to identify the new property and 180 days to close the purchase). This way, you can postpone tax payment until you sell the last property without reinvesting.
These are just some of the tax strategies you can use to reduce your tax burden as a non-resident foreign investor in real estate in the United States. However, you should keep in mind that each case is different, and you should consult with a tax specialist before making any decisions.
In conclusion, real estate investment in the United States for non-resident foreigners offers a unique combination of financial stability, growth potential, and fulfillment of dreams. With a proper understanding of key concepts and the application of smart tax strategies, you as an investor can achieve success and secure your financial future while making your goals and aspirations a reality.
Did you know you can pay 0 taxes in the U.S. with 30 days of free accounting?
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Antonio Coa, CPA
Tax Specialist &
Antonio Coa, LLC
Whatsapp: (561) 814-4558