The U.S. tax filing process can be complex. There can be a maze of federal and state filing requirements that will depend on the selected entity structure as well as where the properties are located. Let’s examine the filing requirements and certain key tax issues.
Once the structure has been determined, the following are typical forms that are required to be filed at the federal level:
- Nonresidents who file as individuals or utilize an LLC that is a disregarded entity will file Form 1040NR.
- Partnerships and /or LLCs with more than one partner will typically file Form 1065. In addition, the individual partners will file Form 1040NR.
- C Corporations are separate taxable entities and file Form 1120.
Once the federal filing requirements have been established, the investor must consider any state tax filing requirements. This issue is often overlooked. If an investor owns property in a specific state they may have tax filing responsibilities and possibly a state tax liability.
The U.S. has 50 states, but only 43 have a state income tax. As a general rule, if an investor owns a property in a given state then that state has the right to tax the owner based on any net rental profits. However, many states have separate minimum filing requirements. For example, many states will not require a taxpayer to file unless a certain amount of income in the state (say for example $1,000) has been earned. So if you have earned less than this amount you would not have to file a return in that state.
As a result of depreciation expense, taxable income will likely be substantially lower than the cash flow from the property. So in many situations, investors would not be subject to a state income tax until the property is sold and presumably a capital gain is recognized.
Return Due Dates
For foreign investors who do not receive wages as an employee in the U.S., Form 1040NR must be filed by the 15th day of the 6th month after your tax year ends. A return for the 2015 calendar year is due by June 15, 2016. However, the above discussion only relates to federal income tax. Many states have different filing timelines and may still require a return to be filed by April 15th for a calendar year taxpayer.
Six-month extensions can be filed that will allocate additional time for investors. But please be advised, a tax extension is merely an extension of time to file your taxes, but will not extend the time to pay your taxes.
Foreign real estate investors have unique tax situations. But education is critical. Make sure that you understand both federal and state tax requirements as they often can vary. This part of the process can be difficult, so that is where the use of a tax professional can help.
About the Author
Paul B. Sundin is a CPA and tax strategist. He works with clients worldwide on real estate tax issues. You can find out more information on him by visiting www.sundincpa.com. Should you have any questions for Paul, you can reach him at 480-361-9400. Use of any information from this article is for general information only and does not represent personal tax advice — either express or implied. Readers are encouraged to seek professional tax advice for personal income tax questions and assistance.