Often, I have nonresident alien clients who come to me for estate planning. In most situations, U.S. real property is involved. Some NRA clients want estate planning to avoid probate, while others aim to save on taxes. It is necessary to consult a tax attorney, such as myself, before proceeding with the purchase of real property as an NRA. Here, I analyze how NRAs will be taxed in different scenarios.
Definition:
For income tax purpose, an alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien (NRA) is an alien who has not passed the green card test or the substantial presence test.
Purchasing as an Investment – Income Tax
Foreign Investment in Real Property Act (FIRPTA)
a) For gains from sale FIRPTA rules treat the gain from the sale of real property as effectively connected income associated with a U.S. business and thus subject to the same tax as a U.S. seller. Individuals are taxed at capital gains tax rates (generally 15% and 20%) and corporations at the corporate rate of 21%.
b) For rents
General Taxation:Income from U.S. real property owned by a nonresident alien is taxed at a 30% rate (or lower if specified by treaty) if it is not effectively connected with a U.S. trade or business.
Special Election:Under IRC Section 871(d), NRAs can elect to treat income from U.S. real property as effectively connected with a U.S. trade or business. This includes all income from rents, royalties, and gains from sales. The election allows NRAs to claim deductions related to the property income, with net income taxed at graduated rates.
Making the Election:
To elect under IRC Section 871(d), NRAs must attach a statement to their tax return, specifying the election and listing all U.S. real property owned. This election remains effective for all subsequent years unless revoked.
NRAs must provide Form W-8ECI to any withholding agent or payer to certify that the rental income is effectively connected with a U.S. trade or business.
FIRPTA Withholding
Withholding Rates:
Sales Price under $300,000: No withholding if the buyer intends to occupy the property as a residence.
Buyers who fail to withhold the required amount may be liable for the tax, plus interest and penalties, if the seller does not pay taxes on the sale.
Exemptions:
Exemptions from withholding include the buyer’s affidavit of intent to occupy the property, the seller’s affidavit of non-foreign status, qualified substitute’s affidavit, or an IRS withholding certificate.
California State Tax
Withholding:
California requires payment of tax at the close of escrow equal to 3.33% of the sales price or an alternative calculated amount.
Exception:The seller fills out an affidavit on FTB Form 593-B, C or E. If the seller cannot qualify for an exemption, then the buyer must withhold.
Example and Calculation:
Example Scenario: Here’s an example examining the tax consequences for the total tax liability for a Nonresident Alien (NRA) owning U.S. real estate worth $1 million with a basis of $500K and annual rental income of $50K, with $10K in costs for rent and electing IRC Section 871(d). We will calculate both federal and state taxes, incorporating FIRPTA withholding and the capital gains tax.
Assumptions:
Sales Price: $1,000,000
Basis: $500,000
Capital Gain: $1,000,000 – $500,000 = $500,000
Annual Rental Income: $50,000
Costs for Rent: $10,000
Net Rental Income: $50,000 – $10,000 = $40,000
Long-term capital gains tax rate for NRAs: 20%
California capital gains tax rate: 13.3%
Federal income tax rate for rental income: 24%
California state income tax rate for rental income: 9.3%
Federal Taxes:
Capital Gains Tax:
Long-term capital gains tax rate for NRAs: 20%
Capital Gain: $500,000
Federal Capital Gains Tax: $500,000 * 20% = $100,000
Income Tax on Rental Income:
Net Rental Income: $40,000
Federal Income Tax Rate: 24%
Federal Income Tax on Rental Income: $40,000 * 24% = $9,600
FIRPTA Withholding:
Sales Price: $1,000,000
Withholding Rate: 15%
FIRPTA Withholding: $1,000,000 * 15% = $150,000
California State Taxes:
Capital Gains Tax:
Capital Gain: $500,000
California Capital Gains Tax Rate: 13.3%
State Capital Gains Tax: $500,000 * 13.3% = $66,500
State Income Tax on Rental Income:
Net Rental Income: $40,000
State Income Tax Rate: 9.3%
State Income Tax on Rental Income: $40,000 * 9.3% = $3,720
State Withholding:
Sales Price: $1,000,000
Withholding Rate: 3.33%
State Withholding: $1,000,000 * 3.33% = $33,300
Total Tax Calculation:
Federal Tax Liability:
Capital Gains Tax: $100,000
Income Tax on Rental Income: $9,600
FIRPTA Withholding:
Withheld: $150,000
Actual Federal Tax Liability: $100,000 (Capital Gains) + $9,600 (Rental Income) = $109,600
Potential Refund: $150,000 – $109,600 = $40,400
California State Tax Liability:
Capital Gains Tax: $66,500
Less State Withholding: $33,300
Net State Capital Gains Tax Liability: $66,500 – $33,300 = $33,200
State Income Tax on Rental Income: $3,720
Final Total Out-of-Pocket Payment:
Federal:
Actual Tax Liability: $109,600 (Capital Gains Tax + Income Tax on Rental)
FIRPTA Withholding: $150,000
Net Federal Payment: $109,600 – $40,400 (refund) = $69,200
State:
Actual Tax Liability: $66,500 (Capital Gains Tax) + $3,720 (Income Tax on Rental) = $70,220
The total out-of-pocket tax payment for the NRA, considering the capital gains from the sale of real estate and annual rental income of $50,000 with $10,000 in costs, and incorporating FIRPTA withholding and state tax withholding, would be approximately $106,120.
2. Gift Tax for Nonresident Aliens
Resident definition: A person is considered to be domiciled in the US for estate and gift tax purposes if he or she lives in the US and has no present intention of leaving. Determining domicile for US estate and gift tax purposes is different than determining US income tax residence.
Gift Tax for Nonresidents Not Citizens of the United States:
What is Considered a Gift for U.S. Gift Tax Purposes? The gift tax applies to the transfer of property by one individual to another while receiving nothing, or less than full value, in return. For nonresident aliens (NRAs), the gift tax applies specifically to transfers of U.S.-situated property. This includes real and tangible personal property located in the U.S., but does not apply to intangible property such as stocks of U.S. corporations (IRC § 2501(a)(2)).
Nonresidents of the U.S. are subject to gift tax for gifts of real and tangible property situated in the U.S. They must file a gift tax return (Form 709) if any of the following apply:
Gifts of future interests.
Gifts of present interests to any donee exceeding $18,000 (for 2024).
Exclusions from Gift Tax: Certain gifts are not subject to gift tax, including:
Gifts not exceeding the annual exclusion amount.
Payments for tuition or medical expenses directly to the institution or provider.
Gifts to a spouse who is a U.S. citizen (limited annual exclusion for non-citizen spouses).
Gifts to political organizations for their use.
Gifts to qualifying charities for use within the United States (IRC § 2522(b)(3) and (4)).
Progressive Gift Tax Rates: The gift tax rates in the U.S. are progressive, meaning they increase as the value of the gift increases. The rates for gifts made in 2024 are as follows:
Value of Gift (Cumulative Lifetime)
Tax Rate
Up to $10,000
18%
$10,001 – $20,000
20%
$20,001 – $40,000
22%
$40,001 – $60,000
24%
$60,001 – $80,000
26%
$80,001 – $100,000
28%
$100,001 – $150,000
30%
$150,001 – $250,000
32%
$250,001 – $500,000
34%
$500,001 – $750,000
37%
$750,001 – $1,000,000
39%
Over $1,000,000
40%
Example Calculation:
Example 1: An NRA gifts U.S. real estate valued at $1,000,000 to their U.S. resident child.
Value of the gift: $1,000,000
Annual exclusion (2024): $18,000
Taxable amount: $1,000,000 – $18,000 = $982,000
The $982,000is subject up to 39%
Sources:
IRS Instructions for Form 709
Internal Revenue Code Section 2501(a)(2)
Internal Revenue Code Section 2523(i)
Treasury Regulation 1.871-10
3. Estate Tax for Nonresident Aliens (NRAs)
Definition: The estate of a nonresident alien (NRA) is subject to U.S. estate tax if it includes property situated in the United States at the time of death. Unlike U.S. citizens and residents, NRAs are taxed only on their U.S.-situated property.
U.S. Property Includes:
S. real estate
Physical personal property located in the U.S.
Stock of a domestic corporation (different from gift tax rules)
Debt obligations issued by a U.S. person
S. patents
Tax Rates: The estate tax rates for NRAs are the same as those for U.S. citizens and residents, with a maximum rate of 40% (IRC Section 2001). However, NRAs are entitled to a significantly lower exemption amount of $60,000. This is considerably lower than the over $13.61 million exemption available to U.S. citizens as of 2024.
Progressive Estate Tax Rates:
Value of Taxable Estate (Cumulative Lifetime)
Tax Rate
Up to $10,000
18%
$10,001 – $20,000
20%
$20,001 – $40,000
22%
$40,001 – $60,000
24%
$60,001 – $80,000
26%
$80,001 – $100,000
28%
$100,001 – $150,000
30%
$150,001 – $250,000
32%
$250,001 – $500,000
34%
$500,001 – $750,000
37%
$750,001 – $1,000,000
39%
Over $1,000,000
40%
Example Calculations: Example 1: An NRA dies holding U.S. real estate valued at $1,000,000.
Applicable Exclusion: $60,000
Taxable Estate: $1,000,000 – $60,000 = $940,000
$940,000 is subject up to 39% of estate tax
Sources:
IRS Instructions for Form 706-NA
Internal Revenue Code Section 2001
Internal Revenue Code Section 2103
Internal Revenue Code Section 2523(i)
California Franchise Tax Board
Filing Tax Returns for Nonresident Aliens (NRAs)
Who Must File:
Nonresident aliens (NRAs) who must file a U.S. income tax return include those who:
Engaged in U.S. Trade or Business: NRAs who were engaged or considered engaged in a trade or business in the United States during the year.
S. Income Not Covered by Withholding: NRAs with U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
Fiduciaries: A fiduciary for a nonresident alien estate or trust.
Representatives or Agents: A representative or agent responsible for filing the return of an NRA individual as described above.
Care of a Nonresident: A resident or domestic fiduciary charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax (Refer to Treas. Reg. 1.6012-3(b)).
Which Income to Report:
NRAs must generally report income in two categories:
Effectively Connected Income (ECI): Income effectively connected with a trade or business in the United States. This income, after allowable deductions, is taxed at graduated rates similar to those that apply to U.S. citizens and residents. It should be reported on page one of Form 1040-NR.
Fixed, Determinable, Annual, or Periodical (FDAP) Income: U.S. source income that is not effectively connected with a U.S. trade or business. This income is taxed at a flat 30 percent rate (or lower treaty rate, if applicable) and no deductions are allowed. FDAP income should be reported on Schedule NEC (Form 1040-NR).
Forms and Deadlines:
Form to Use:
Form 1040-NR: U.S. Nonresident Alien Income Tax Return.
Deadlines:
Employees Receiving Wages: NRAs who receive wages subject to U.S. income tax withholding must generally file by the 15th day of the 4th month after the tax year ends (April 15 for those using a calendar year).
Others: NRAs who are not employees or who receive other income subject to withholding must file by the 15th day of the 6th month after the tax year ends (June 15 for those using a calendar year).
Where to File:
Mail Form 1040-NR: To the address shown in the instructions for Form 1040-NR.
Extension of Time to File:
Form 4868: If an NRA cannot file by the due date, they should file Form 4868 to request an automatic extension of time to file. This must be filed by the regular due date of the return.
Loss of Deductions and Credits:
To benefit from any allowable deductions or credits, the NRA must timely file a true and accurate income tax return. The IRS may deny deductions and credits on tax returns filed more than 16 months after their due dates (Refer to the Filing Information chapter of Publication 519, U.S. Tax Guide for Aliens).
Departing Aliens:
Certificate of Compliance (Sailing Permit):
Before leaving the United States, most aliens must obtain a certificate of compliance, popularly known as the sailing or departure permit, from the IRS. This is secured after filing Form 1040-C or Form 2063.
Annual U.S. Income Tax Return:
Even if an NRA has left the United States and filed a Form 1040-C on departure, they must still file an annual U.S. income tax return. If married and both spouses are required to file, each must file a separate return unless one spouse is a U.S. citizen or resident alien, in which case they could file a joint return (Refer to Nonresident Spouse Treated as a Resident).
Sources:
IRS Publication 519 – U.S. Tax Guide for Aliens
Internal Revenue Code (IRC) Section 871
Internal Revenue Code (IRC) Section 6012
Treasury Regulation 1.871-10
IRS Instructions for Form 1040-NR
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Cynthia Wu is the Founder and Managing Partner of a law firm, with a strong legal background encompassing complex business litigation, probate, and guardianship cases. She holds a Juris Doctor degree from the University of Arizona and an LLM in Taxation from the University of Florida. Cynthia's experience spans estate planning, probate, and business litigation, and she is admitted to practice law in California, the District of Columbia, Texas, and Florida, as well as before the U.S. Tax Court and the Chinese National Bar.
Tax Consequence for Nonresident Aliens (NRAs) Owning U.S. Real Estate
By Cynthia Wu
Often, I have nonresident alien clients who come to me for estate planning. In most situations, U.S. real property is involved. Some NRA clients want estate planning to avoid probate, while others aim to save on taxes. It is necessary to consult a tax attorney, such as myself, before proceeding with the purchase of real property as an NRA. Here, I analyze how NRAs will be taxed in different scenarios.
Definition:
FIRPTA rules treat the gain from the sale of real property as effectively connected income associated with a U.S. business and thus subject to the same tax as a U.S. seller.
Individuals are taxed at capital gains tax rates (generally 15% and 20%) and corporations at the corporate rate of 21%.
Making the Election:
FIRPTA Withholding
Withholding Rates:
Penalties:
Exemptions:
Withholding:
Example and Calculation:
Example Scenario:
Here’s an example examining the tax consequences for the total tax liability for a Nonresident Alien (NRA) owning U.S. real estate worth $1 million with a basis of $500K and annual rental income of $50K, with $10K in costs for rent and electing IRC Section 871(d). We will calculate both federal and state taxes, incorporating FIRPTA withholding and the capital gains tax.
Assumptions:
Federal Taxes:
Capital Gains Tax:
Income Tax on Rental Income:
FIRPTA Withholding:
California State Taxes:
Capital Gains Tax:
State Income Tax on Rental Income:
State Withholding:
Total Tax Calculation:
Federal Tax Liability:
FIRPTA Withholding:
California State Tax Liability:
Final Total Out-of-Pocket Payment:
Federal:
State:
Total Out-of-Pocket Payment:
Total: $69,200 (Federal) + $36,920 (State) = $106,120
Conclusion:
The total out-of-pocket tax payment for the NRA, considering the capital gains from the sale of real estate and annual rental income of $50,000 with $10,000 in costs, and incorporating FIRPTA withholding and state tax withholding, would be approximately $106,120.
2. Gift Tax for Nonresident Aliens
Resident definition: A person is considered to be domiciled in the US for estate and gift tax purposes if he or she lives in the US and has no present intention of leaving. Determining domicile for US estate and gift tax purposes is different than determining US income tax residence.
Gift Tax for Nonresidents Not Citizens of the United States:
What is Considered a Gift for U.S. Gift Tax Purposes? The gift tax applies to the transfer of property by one individual to another while receiving nothing, or less than full value, in return. For nonresident aliens (NRAs), the gift tax applies specifically to transfers of U.S.-situated property. This includes real and tangible personal property located in the U.S., but does not apply to intangible property such as stocks of U.S. corporations (IRC § 2501(a)(2)).
Nonresidents of the U.S. are subject to gift tax for gifts of real and tangible property situated in the U.S. They must file a gift tax return (Form 709) if any of the following apply:
Exclusions from Gift Tax: Certain gifts are not subject to gift tax, including:
Progressive Gift Tax Rates: The gift tax rates in the U.S. are progressive, meaning they increase as the value of the gift increases. The rates for gifts made in 2024 are as follows:
Value of Gift (Cumulative Lifetime)
Tax Rate
Up to $10,000
18%
$10,001 – $20,000
20%
$20,001 – $40,000
22%
$40,001 – $60,000
24%
$60,001 – $80,000
26%
$80,001 – $100,000
28%
$100,001 – $150,000
30%
$150,001 – $250,000
32%
$250,001 – $500,000
34%
$500,001 – $750,000
37%
$750,001 – $1,000,000
39%
Over $1,000,000
40%
Example Calculation:
Example 1: An NRA gifts U.S. real estate valued at $1,000,000 to their U.S. resident child.
Sources:
3. Estate Tax for Nonresident Aliens (NRAs)
Definition: The estate of a nonresident alien (NRA) is subject to U.S. estate tax if it includes property situated in the United States at the time of death. Unlike U.S. citizens and residents, NRAs are taxed only on their U.S.-situated property.
U.S. Property Includes:
Tax Rates: The estate tax rates for NRAs are the same as those for U.S. citizens and residents, with a maximum rate of 40% (IRC Section 2001). However, NRAs are entitled to a significantly lower exemption amount of $60,000. This is considerably lower than the over $13.61 million exemption available to U.S. citizens as of 2024.
Progressive Estate Tax Rates:
Value of Taxable Estate (Cumulative Lifetime)
Tax Rate
Up to $10,000
18%
$10,001 – $20,000
20%
$20,001 – $40,000
22%
$40,001 – $60,000
24%
$60,001 – $80,000
26%
$80,001 – $100,000
28%
$100,001 – $150,000
30%
$150,001 – $250,000
32%
$250,001 – $500,000
34%
$500,001 – $750,000
37%
$750,001 – $1,000,000
39%
Over $1,000,000
40%
Example Calculations: Example 1: An NRA dies holding U.S. real estate valued at $1,000,000.
Sources:
Filing Tax Returns for Nonresident Aliens (NRAs)
Who Must File:
Nonresident aliens (NRAs) who must file a U.S. income tax return include those who:
Which Income to Report:
NRAs must generally report income in two categories:
Forms and Deadlines:
Form to Use:
Deadlines:
Where to File:
Extension of Time to File:
Loss of Deductions and Credits:
Departing Aliens:
Certificate of Compliance (Sailing Permit):
Annual U.S. Income Tax Return:
Sources:
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