The 2017 Tax Act and U.S. Real Estate: The Foreign Investor and Unusually Low Tax Rates
By Richard S. Lehman, Esq.
Introduction
The boom in U.S. real estate caused by foreign investors is about to get bigger as a result of greatly reduced U.S. income taxes for nonresident aliens and foreign corporations.1
Because of the new 2017 tax act,2 foreign investors could receive a 40% reduction in the U.S. income tax of their gains and income from their real estate investments. For those foreign investors who already were invested in U.S. real estate, their after-tax returns could now be 40% more valuable without their raising a finger.3
Tax rates on U.S. real estate income were lowered to 21% for corporations, both foreign and domestic.4 With U.S. home inventories low, a world in turmoil, and many countries around the world continuing to charge high tax rates, the flow of foreign investment to real estate in the United States will only increase as a result of the 2017 tax act.
Furthermore, not only has the after-tax income of real estate investments gone up for the foreign investor, the investment structure has become simpler.
This article will focus on:
- investment structures that will be helpful to large, medium, and small investors;
- the simplicity of the new requirements; and
- the extraordinary tools available to the foreign investor that can reduce the foreign investor’s tax burden to an even lower rate than those enjoyed by the American taxpayer.
The 2017 tax act not only reduces the tax rate on real estate profits, it decreases the amount of income that will be taxed annually in the early years by decreasing the time in which deductions can be taken in calculating taxable income. The long and the short of this is that with a little tax planning, the foreign investor should be able to earn ordinary annual income from the rental of U.S. real estate at a tax cost of approximately 15% and from the sale of U.S. real estate at a tax cost in the 21% range.
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