Real Estate (“R.E.”) investments in the United States (“U.S.”) and their tax implications are subject to various factors that determine the investment’s viability and efficiency according to the investor’s necessity.
This article will focus on Personal Investment in relation to state and local capital gain tax, ordinary income tax, and federal estate tax.
As it was explained in Investments in the United States, Part I, all ordinary income and capital gain may be subject to state and local tax, which rate varies from state to state. There are some states that do not asses a tax on personal income, such as Florida. Nonetheless, Florida has a 5.5% corporate income tax (as will be discussed in the forthcoming articles).
Besides Florida, Alaska, Nevada, South Dakota, Texas, Washington and Wyoming do not have a personal income tax. While New Hampshire and Tennessee impose a tax only on interest and dividend income, all other states have some sort of personal income tax. The state with the highest tax rate is California at 13.3%, and one with the lowest rate is North Dakota at 3.22%. In addition, some states, like New York, allow cities and/or counties to impose taxes. Accordingly, New York City levies a local income tax of 3.88%, which combined with New York State tax of 8.82%, reaches a total of 12.7%.
(See below a list of some cities that levy a separate individual income tax).
STATE AND LOCAL TAX
New York City, NY
It is worth noting that gifts of intangible personal property, e.g., U.S. stocks and bonds, are exempt from U.S. gift tax for NRAs, as opposed to estate taxation –as previously described.Foreign nationals not U.S. residents or Non-Resident Aliens (“NRAs”) not domiciled in the U.S. are also subject to federal estate taxation with respect to certain U.S.-situated assets. These assets include: (1) R.E. in the U.S. at the date of death; (2) tangible personal property (e.g., motor vehicles, artwork, watercrafts, animals, precious gems and metals) physically located in the U.S. at the date of death; and (3) intangible personal property such as securities of U.S. companies, personal and U.S. corporate debt securities (except for securities that generate portfolio interest which is an interest on an obligation issued by a U.S. person where the beneficial is a foreign person who is not a 10% shareholder in the issuer at the time the interest is received), patents, trademarks, and copyrights.
As of 2014, the highest tax rate on Estate Tax is 40% (see the chart below with the applicable rates).
TENTATIVE TAX EQUALS
|PLUS||OF AMOUNT OVER|
|0 – $10,000||$0||18%||$0|
|$10,000 – $20,000||$1,800||20%||$10,000|
|$20,000 – $40,000||3,800||22%||$20,000|
|$40,000 – $60,000||$8,200||24%||$40,000|
|$60,000 – $80,000||$13,000||26%||$60,000|
|$80,000 – 100.000||$18,200||28%||
|$100,00 – $150,000||$23,800||30%||
|$150,000 – $250,000||$38,800||32%||$150,000|
|$250,000 – $500,000||$70,800||34%||$250,000|
|$500,000 – $750,000||$155,800||37%||$500,000|
|$750,000 – $1,000,000||$248,300||39%||$750,000|
A NRA estate is allowed to claim a credit of $13,000, which excludes the first $60,000 of property from U.S. taxation, as opposed to the estate tax exemption of $5,340,000 (in 2014) available for U.S. citizens and resident aliens.
The U.S. has entered into several estate tax treaties which allows NRAs to avoid double taxation. In the event that a NRA (being a citizen of, or domiciled in, the treaty country) dies owning taxable U.S. situated assets, the NRA estate may claim available credits and deductions.
As described, personal investments in the U.S. are subject to different tax rules. Accordingly, it is mandatory to examine the investor’s goals and objectives because there are scenarios where a personal investment can result more advantageous than an investment through a company. As an illustration, the maximum capital gain tax rate for individuals is 20% as opposed to an almost 40% federal and state combined rate for Florida corporations, as it will be discussed in the forthcoming articles.
Cav. Piero Salussolia,Esq.;
Lizet Cardozo, Abg. (admitted in Colombia only);
Monica Tirado, Abg. (admitted in Colombia only).
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