Estate Tax Implications for Foreign Investors in US Real Estate
Estate taxes for US persons
An estate of a US citizen or resident alien is subject to an estate tax based upon the value of the worldwide property, owned or subject to certain rights or powers by the decedent on the date of death. The estate tax rate for 2018 is 40% for taxable estates in excess of an $11.18 million exemption, which is adjusted annually for inflation.
A US estate may also deduct from the taxable estate a marital deduction equal to the value of property left to a surviving spouse. The amount of lifetime taxable gifts during the decedent’s life is also included in calculating the gross estate.
Non-resident aliens and their estate taxes
While US citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, non-residents (persons who are neither US citizens nor US domiciliaries) are only subject to the US estate tax on property that is situated, or deemed situated, in the United States.
The gross estate of a Non-Resident Alien (“NRA”) includes all tangible and intangible property situated in the US, in which the decedent has an interest at the time of his death or over which he has certain rights or powers.
The taxable estate of an NRA is taxed at rates up to 40% of the value of estate in excess of a $60,000 exemption. Additionally, the estate of an NRA is generally not allowed a marital deduction unless the surviving spouse is a US citizen.
US property included in an NRA’s estate includes US real property owned or under his control and interests in US partnerships (including those holding positions in real property).
It is important to note the US does have estate tax treaties with multiple countries including Canada, France, Germany, Greece, Italy, Japan, and the UK, amongst others. These treaties may provide estate tax relief to residents of treaty jurisdictions.
Non-citizen spouse
When your spouse is not a US citizen, the unlimited marital deduction is unavailable. This is true regardless of whether or not the decedent is an American citizen. The result is the $11.18 million exemption is unavailable and the entire estate transferred to a non-citizen spouse would be subject to estate tax. With advance planning, the non-citizen spouse estate tax implication can be reduced or eliminated.
Planning to reduce estate taxes
There are several structures that will avoid or minimize the US estate tax of a Non-Resident Alien:
- The property can be held in the name of a foreign corporation.
- The property can be held in an irrevocable trust or a trust whose assets would not be included in the settlor’s gross estate for US estate tax purposes.
- The title can be held in a two-tier structure with the property in the name of an American company (US real property Holding Corporation) whose shares are held by an offshore company.
Although these structures are intended to avoid the US estate tax, the structures may result in the unintended consequence of higher taxes on sale, rental income, and, in some jurisdictions, franchise taxes.
We’ve got your back
If you are a Non-Resident Alien, we can help you plan so that your estate pays no more tax than necessary, while avoiding those unintended consequences. Contact Simon Filip, the Real Estate Tax Guy, at sfilip@krscpas.com or 201.655.7411 today.
