Expats - IRS Finally Tries to Make It Easier for You to Find Answer`

The IRS has released an International, Nonresident and Expatriate tax index.  They call it Tax Map.  Hopefully it will answer your questions... but those answers may not be understandable.  That is where you may still need a US International Tax Expert.  You can go to the Tax Map here.

Topics covered run from Alien Departure Permits to Working Abroad.  If you need further help email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.  where many of these complex tax issues are simplified.

The latest expat and international developments are immediately posted at our blog: www.usexpatriate.blogspot.com 

US Nonresidents Purchasing US Investment Property- IRS Tax Rules

US real estate can be a great investment and produce income as rental.  In most situations you can even obtain very favorable income tax treatment.  As a nonresident there are no restrictions on owning US real property for personal or rental purposes.

The Good Tax News:

• No restrictions on US nonresidents investing in US rental properties.  Nonresidents income tax on the investment is the same as that paid by US residents if they make the proper election to have the rental treated as doing business in the US.
• Residential rentals are depreciated over a 27.5 year period.  You must allocated the purchase price between the building (which can be depreciated) and the land which cannot be
  
  depreciated. The depreciation taken each year reduces your taxable income from the property.
• You must file form 1040NR with the IRS each year and a state income tax return if the property is located in a state with income taxes (which is most likely).
• If you wish to sell your original rental and trade into another one you are eligible to do so tax free if you qualify under the IRC 1031 tax free exchange rules. The new rental must still be located in the US.  You cannot tax free exchange into a rental property outside of the US.

The Bad News (with  possible solutions):

• If the nonresident dies while owning the property the fair market value of the property will be subject to US estate tax to the extent it exceeds $60,000.    However, the property will then have a new stepped up basis for US income tax purposes equal to the fair market value on the estate tax return.  There are ownership methods  using foreign trusts or corporations which  can be used to avoid the estate tax.

We can advise you on all the  US tax aspects  ( and most legal and financial questions) involved in the purchase of real estate or businesses in the US while you are a nonresident.  Email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.com or www.expatattorneycpa.com.

US Tax Treaties May Allow Nonresidents to be Taxed at Lower Rates

Tax treaties may allow residents of foreign countries to be taxed at a reduced rate, or to be exempt from U.S. income taxes on certain items of income they receive from sources within the United States.  Whenever you are a US Nonresident and the US has a tax treaty with your resident country, you MUST review that treaty to determine if it has benefits.

Treaties rarely benefit US Citizens or Green Card Holders due to the savings clause contained in almost all treaties which state that the IRS can still continue to tax its US tax residents and Citizens under the regular tax law regardless of what a treaty might state.  A US taxpayer residing in a treaty country may be able to use the treaty to avoid adverse tax consequences in that country. There is no standard treaty so each applicable treaty must be reviewed to determine its consequences.  Unfortunately the language used in the treaties if often vague and unclear. The IRS has not done much to clear up the ambiguities and to explain those parts which are unclear.

• Tax Treaty Overview
• Researching Tax Treaties
• Claiming Tax Treaty Benefits
• Competent Authority Agreements
• Competent Authority Assistance
• Items of Interest
• Certification of U.S. Residency for Tax Treaty Purposes
• The Effect of Tax Treaties
• The Transition Rules Regarding Articles 19 and 20 of the USA-Japan Income Tax Treaty of 2004
• The U.S. Model Income Tax Convention and Model Technical Explanation
• Mandatory Tax Treaty Arbitration

Look here for the complete texts of many of the tax treaties in force and their accompanying Treasury Technical Explanations. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents page.

US Nonresidents Must Pay Tax on Their US Income

If you are a US nonresident (this is someone who does not have a green card or is not a US Citizen) and come to the US to work for a few months, you are obligated file a US tax return on your US source earnings (whether paid by a US company or a foreign company).  Your earnings might be exempt from tax under US tax treaty with your home country, but you still need to file the return to claim that  treaty exemption. Depending on the social security agreements in effect, it might even be subject to US self employment tax (social security) if you are an independent contract.

If you as a nonresident are going to file a US tax return, you need to secure a taxpayer identification number also. That process has recently become somewhat cumbersome and difficult.


A nonresident working in the US may under the laws of the state in which he or she works also be required to file a state tax return.

Failure to file a tax return will result in the statute of limitations for later requiring a return or tax to never run out.  Therefore, when in doubt you should as a nonresident always file a return.

The good news is that US nonresidents are not subject to tax on their interest income from banks, savings and loans and US treasury bills or on their capital gains from the sale of US stocks (so long as theses are investments and not connected with their US business).

Learn more about the US taxation of nonresidents at www.TaxMeLess.com 

Tax Planning for Acquiring US Citizenship or a Green Card (Permanent Residency)

Those who acquire US permanent residency and/or  US Citizenship often are caught by surprise when it comes time to sell assets (property or stocks or ?) owned before they became US taxpayers.  They  often erroneously assumed the assets they owned before becoming US taxpayers will have a tax basis equal to the value of those assets on the date they became US taxpayers. THIS IS NOT CORRECT.

Under US tax law including Court Decisions, even though an asset was acquired many years before becoming a US taxpayer (Citizen or tax resident) the tax basis for determining gain or loss is the original cost basis of the property (or if inherited the fair market value of the property when it was inherited).  That means when the asset does not get a revised basis on the date of becoming a US taxpayer and US taxes will be paid on appreciation of the asset prior to the date the individual became a US taxpayer.

What to do?  Before becoming a US taxpayer, consider selling your highly appreciated assets to avoid paying US taxes on the gain that occurred prior to that date.

The one exception to the rule stated above, is when you  Surrender your Citizenship or Long Term Tax Residency, for the purposes of determining if you have to pay an exit tax on form 8854, your tax basis IS the fair market value of the property or asset on the date you first became a Long Term Resident or Citizen.

US Nonresidents with Assets in the US will have their US Estates Subject to US up to 34% estate taxes

US nonresidents with certain assets located in the United States will cause their estates to have to file US Estate Tax returns on the value of their assets (with some exceptions) located in the USA. The tax is based on the Fair Market Value of their Assets and can be up to 35%. Nonresidents only get an exemption from this tax equal to the first $60,000 value of the fair market value of their assets in the US. The balance  of the estate's assets are subject to the estate tax.  Real estate which was owned by a deceased nonresident is subject to this tax.  The estate can only deduct the mortgage balance due from the fair market value if the estate agrees to report to the IRS the value an details of the decedents worldwide assets including those in Mexico.

Due to the large chunk this estate tax can take out of a nonresident's estate, it is best to do some advance planning to attempt to reduce it.  Email us if you want help. Read more about the nonresident  estate tax here