Resident -> Non Resident Tax implication for investment propertie

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Resident -> Non Resident Tax implication for investment propertie

Steve R.
Member since 2017 · 93 posts · 44 votes

Hi,

I am currently a Resident of Texas and have 3 rental properties (+ 1 primary home) in Texas and have 1 rental property in Alabama. I am neither a citizen or a green card holder. I will be moving to out of country due to personal reasons. I am planning to sell my primary residence and 2 of my investment properties in Texas before I move out of the country. The remaining 1 rental property in Texas and 1 rental property in Alabama is giving me excellent cash flow now. I was reading up on the tax implication if one becomes a non resident. I read that there would be a flat 30% tax on the rental income if one becomes a Non Resident Alien. Is that 30% on the (rental income - property tax) or the full rental income ? Will I be eligible for any deductions from the rental income?

I thought of establishing a LLC and treat the income as ECI but there are complex tax implications in the country I am moving to if I own a foreign business entity. So that might not be an option, but I have to still explore it a bit more.

Is there any other option for me to reduce the tax burden? 

Thanks,

Steve

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y

@Steve R.

The property is here so you will have some sort of filing requirement here.

[email protected]917-280-8544
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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Steve R.

    Rental property for foreign investor - ECI Treatment > FDAP Treatment.
    You should talk to a CPA if an entity is required to get ECI treatment.

    If you sell the property - potential FIRPTA.

    [email protected]917-280-8544
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  • Steve R.
    OP
    Member since 2017 · 93 posts · 44 votes
    6y

    Thanks Basit. 

    The country I am moving to (India) has DTAA (Dual Tax Avoidance Act). So if I pay taxes on my rental income here I don't have to pay taxes in India. If I treat the income as ECI, will I be paying taxes in USA on net income (after PITI + management fees _ expenses)) I earn here?

    If I don't pay taxes here, I will have to pay 30% tax on Foreign earned income in  India which would kill my cash flow as well.

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Steve R.

    The property is here so you will have some sort of filing requirement here.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    2Reply
  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    Income tax is just one side of the coin.  You'll also want to consider your US estate tax exposure, especially if the properties are high-value.

    2Reply
  • Steve R.
    OP
    Member since 2017 · 93 posts · 44 votes
    6y

    I am selling all the high value properties before leaving country. The ones that I am holding are relatively cheap but they are giving me really good cash flow (Combined value for these 2 properties is less than 200k but rent I derive from these 2 in total is around 2.5K). Thats why I wanted to hold on to these properties so that it would provide me good cash flow. But the taxes seems to be the issue I have to deal with.  

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    6y

    @Steve Rick

    There are ways to do pre exit planning to lock in value of properties and have them escape US estate tax.

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  • Steve R.
    OP
    Member since 2017 · 93 posts · 44 votes
    6y

    Thanks Lance.

    As I mentioned I am not really worried about estate planning right now, because I might be back in US (for good) after few years time when I decide to sell this property or gift it to my children. 

    My main concern is the taxation on the rental income when I become a Non Resident Alien. 

    Atleast if they let the property tax to be subtracted from the rental income when applying 30% taxation it would be a good relief. 

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    6y

    There is an election to treat rental real estate as ECI allowing all deductions against gross rents, and taxed at marginal rates. When you speak to your CPA, consult about it.

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  • Steve R.
    OP
    Member since 2017 · 93 posts · 44 votes
    6y

    @Lance Lvovsky

    Thanks. Yeah thats the option I am trying to explore to see if i can treat it as ECI without establishing LLC as there are complications in India for foreign business entities.

    0Reply
  • Sebastien Hitier
    Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes
    6y

    @Steve R. I am not a tax professional, but my understanding of 871(d) election https://www.law.cornell.edu/uscode/text/26/871 is that there is no need for a LLC, you just add a sheet of paper to your tax return where you say

    § 871(d) Election to treat real property income as effectively connected with U.S. business

    (a) property(b) interest(c) location(d) improvements(e) election year

    After listing the 5 columns above for each property, you say it is your election for fiscal year xxx, you put your SSN or ITIN and sign.

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