As I celebrate five years of writing my column, there are now over 1,700 weekly subscribers to this newsletter, not including those who read us on Facebook and Twitter.Even though my reach is not quite global, the information I provide does make its way around to different corners of the world.
So I’d like to exercise my “influence” and take a minute to direct you to a story I wrote yesterday.We all get emails from well-meaning friends and family warning us about unknown dangers, political tactics and other sensational headlines. When something sounds fishy, I pop over to Snopes.com to verify the story they’re telling. I wish everyone would take a minute to do that before hitting “forward.”
This week I’ve received multiple emails regarding the 3.8% Medicare tax that Obama snuck into law that will effect everyone on January 1, 2013! Is it true? Click HERE to find out. Now onto today’s topic.
I’d like to share some secrets for foreign investors (and US investors, too.) The headlines say that Canadians and people from all over the world are flocking to Las Vegas to buy real estate. The combination of incredibly low-priced homes and the favorable exchange rates make buying in Las Vegas an easy decision.
Compare our low property taxes and the appeal of Las Vegas for its entertainment, shopping, restaurants and consistently good weather to any other US city and we’re the clear winner. The issue that’s rarely discussed with non-US buyers is how they will work with the Internal Revenue Service (IRS) to pay their taxes.
Since the majority of foreign buyers are investors, they’ll be getting income from their tenants, which is considered as US-sourced income and is taxable by the IRS (there is no alternative or way out of being subject to US taxes.)
Unfortunately, the majority of real estate salespeople have no idea how the process works or how to help their clients own a rental property. Some people think I’m crazy to give away my insider secrets, but I hope you’ll realize the difference we offer you versus some other choices you could make.
When you hire a management company to handle your properties, you will be required to fill out a W-8ECI from the IRS, but you’ll need an Individual Tax Identification Number (ITIN), Social Security Number (SSN) or Employer Identification Number (EIN). To apply for a ITIN, you must file a W-7 along with your tax return.
Sounds easy, but wait. You can’t file a tax return unless you’re paid income. Without a TIN, you can’t be paid income. If you’re not paid anything, you can’t be issued a 1099, which is what you need to file income taxes. That means you can’t get a TIN. That’s a Catch-22, now what do you do?
If I haven’t confused you entirely yet, let me go one step further. Without a TIN, SSN or EIN, you can’t open up a checking account in the US, which you’ll want to have while doing business here, although it’s not mandatory.
Having done it the hard way for my clients before, I needed to find an alternate, much simpler (and relatively inexpensive) way to obtain their TIN, set up their bank account and establish a business structure that was easy to do before they ever came here to start shopping for homes.
Here’s the secret – you will establish an LLC (Limited Liability Corporation) which not only allows you to legally collect rent and declare it to the IRS but gives you greater tax savings, asset protection from tenant and personal lawsuits, a lower audit rate from the IRS and increased deductions. All for under $1,000.
An LLC offers US residents the same benefits and I highly recommend everyone set up this structure for their investment properties (after consulting with a tax professional, of course.) The added bonus for foreign investors is that the TIN is an automatic part of the process.
There is one other way to get your TIN. You just need to win a jackpot payout in one of our local casinos, then you’ll be issued your number immediately. Somehow, though, setting up the LLC and buying an income-producing property (or two) is the easier path to follow.
Here’s the biggest reason why you’ll need a TIN as a foreign buyer, no matter whether you use the property for investment or your second home. When you sell your property, no matter whether you made a profit or not, without a TIN to give the escrow company, you will be subject to FIRPTA, which means 10% of the price the property sells for will be withheld and sent to the IRS.
FIRPTA stands for the Foreign Investment in Real Property Tax Act, which was enacted in 1980. 10% of the purchase price is steep and can only be reduced by filing a US tax return.
Every path leads to the same conclusion – you must have your TIN when pursuing real estate in the United States because you will be dealing with the IRS. Let us help you get started by doing things the right way, you’ll be glad you did.
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