Aussie Expats Buying Property In the US
Thinking about buying property in the United States? Unlike Australian tax legislation, the IRS works very differently when you are investing in ‘Real Property’ in the US. A US ‘Real Property’ interest refers to sales of interest in parcels of real property, as well as sales of shares in certain US corporation that are considered US real property holding corporations.
Have you heard of FIRPTA? Probably not, but it stands for the Foreign Investment in Real Property Tax Act. The tax act states that the disposition (sale) of a U.S. real property interest by a foreign person (the transferor) is subject to a 15% income withholding tax on the gross sales price. This 15% withholding tax is deducted from the buyer’s funds and transferred to the IRS. We are often asked by our Australian expat clients on what are the key issues that aussie expats buying property in the US need to be aware of.
If you’re an expat returning to Australia after living overseas, you must make sure that you file your last tax return with the IRS, as this will determine whether you are entitled to some sort of tax refund on the withholding tax you paid. In the past, we have seen Australian expats return home and completely forget about their ongoing tax filing requirements with the IRS after the sale of their property. This means they missed the opportunity of receiving their apportioned tax refund if relevant and it can become quite costly to play catch up again.
There are certain avenues that foreign residents can take to either reduce this withholding tax or receive an exemption but much of this can fall on the new buyer.
Main Residence Exemption
You are able to apply for a Main Residence Exemption if both of the following conditions are met:
- The buyer is acquiring the property that will be used as their permanent place of residence(PPOR)
- The sales price is $300,000 or less,
The buyer can then elect to be exempt from withholding under Section 1445(b)(5) of the Tax Code.
Reduced Rate of Withholding
Another option is to apply for a Reduced Rate of Withholding if both of the following conditions are met:
- The buyer acquiring the property is using it as their PPOR,
- The sales price is greater than $300,000 but less than $1,000,000. Then the buyer may choose to withhold a reduced withholding amount equal to 10% of the sales price compared to the normal rate of 15%.
Not following up on your withholding tax by lodging a return is a common trap for aussie expats buying property in the US and something they only become aware of when they receive their proceeds from the sale and see the amount being withheld on their settlement statement.
Do you fall into this category? If you’re unsure it may be time for a professional review.
Disclaimer – the above commentary is general in nature and should not be construed as tax or financial advice. Please consult a licensed tax accountant and financial adviser to determine whether the above information is suitable for you.