Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I’m a Chinese national looking to purchase a property in the United States for my child to live in as she attends college but I may sell or rent it after she graduates. Can I buy the property under her name and if so, what are the tax implications if it’s under her name vs. mine?
A: “The primary issue is estate and gift tax,” said Russell Stanaland, principal of Stanaland & Associates, a tax and estate planning firm in San Francisco.
“There’s no one answer for every client,” because title can be held by an entity—of which there are many types—or a person, said Kevin Packman, partner at Holland & Knight law firm in Miami.
“If the Chinese national buys and title is transferred to the name of the daughter, it could be arguably a gift, and a gift tax would apply,” said Mr. Packman, who also chairs Holland & Knight’s Tax Compliance Group and International Private Wealth Group.
That gift tax for foreigners is 40% on anything that exceeds an annual exclusion gift of $14,000, he said.
Mansion Global is now on LinkedIn. Join the discussion.
“The better approach is just to give a check to the daughter and let her buy the property,” he said. “If the money is transferred offshore (via wire, cash, or check drawn on a foreign account), there is no gift tax. But if the recipient of the gift is a U.S. taxpayer, then a Form 3520 needs to be filed if the gift exceeds $100,000,” he said. Form 3520 is an information return, not a tax return.
As the homeowner, the daughter would have to pay property taxes. “She gets to deduct the property tax,” Mr. Stanaland said. “But she’s a student, so it doesn’t do her any good,” because she presumably wouldn’t have much taxable income.
When a homeowner dies, an estate tax is due, Mr. Packman said. When the owner is a foreigner, his estate must pay a tax of 40% on the value of the home that exceeds $60,000.
One way to avoid the federal estate tax is “if you take title to real estate through an entity,” he said. However, many individual states also have an estate tax, ranging from 5.6% to 20%.
Foreign nationals may consider setting up a limited liability company, which would hold title to the property, Mr. Stanaland said. An LLC offers privacy and protection from debtors going after the house.
House for rent
If the home becomes rental property, the rental income would be taxed at 30%. However, “an individual will want to make an election with the Internal Revenue Service that they are engaged in U.S. trade or business,” Mr. Packman said. “This means the individual files a U.S. income tax return reporting the rental income but is eligible to deduct expenses.”
House for sale
When the property is sold, the seller must pay a tax on the gain. The federal rate varies from 15% to 29%, depending on filing status, income and depreciation, Mr. Stanaland said. Some states, including California, Minnesota and New York, also impose a tax.
Buyers should know that “when a foreigner sells real estate, the buyer is obligated to withhold 15% of the gross sales price. That amount goes to the IRS,” Mr. Packman said, referring to the Foreign Investment in Real Property Tax Act.
Why not to have the home in child’s name
There are also many non-tax-related reasons not to buy a house under the child’s name, Mr. Stanaland said.
“What if child runs up debts and a lien is placed on the house? Or what if she gets in a car wreck and is sued?” Mr. Stanaland asked, noting that Americans sue one another “with disgusting regularity.”
An LLC can help shield a home from being seized. If a lawyer does a property search and finds out you’re a Chinese national with no assets, they’re not interested in a lawsuit, Mr. Stanaland said. “If you don’t have assets, you’re bulletproof.”
Something else to consider: “What if the child gets married and decides to convert the property into community property?” he said. (Community property laws apply in nine states, including California.) “That house you bought for your daughter now belongs to a son-in-law, too.”
But an LLC, through its operating agreements, can restrict such a move, Mr. Stanaland said.
More from Mansion Global:
Follow Mansion Global:Facebook | Twitter | Instagram | LinkedIn | Messenger
Write to us: email@example.com