Cross Border Tax Planning Information
Foreign Investment in U.S. Real Estate. When a foreign person or business buys U.S. real estate, the purchaser is buying a ticket for admission to the U.S. tax system. For an individual, ownership of U.S. property at death will result in a U.S. estate tax even if the property is owned through a business entity (other than a corporation). For a business that purchases U.S. property or an individual that owns that property directly, rental income will be subject to 30% withholding unless reduced as a result of a tax treaty between the foreign investor’s county of residence and the United States. However, many U.S. income tax treaties provide no relief for rental income (including the tax treaty between the United States and Canada).
Inbound U.S. Planning. Foreign individuals and U.S. businesses can fall into the U.S. tax system with surprising ease. Absent relief provided by a tax treaty between the United States and the foreign investor’s country of residence, income from U.S. sources will be subject to a 30% rate of withholding. Further, unlike most industrialized nations, the United States taxes on the basis of citizenship, not residency. Individuals born abroad to U.S. parents are U.S. citizens and subject to U.S. income and estate taxation and information-reporting obligations. Individuals born in the United States are also U.S. citizens subject to the same compliance obligations without regard to the nationality of the person’s parents or length of time in the U.S. Despite these traps, numerous strategies exist for inbound investment which will avoid or minimize U.S. income and estate tax taxation.
Inbound U.S. Investment for Residents of Canada. The tax treaty between the U.S. and Canada creates many opportunities for Canadians to invest successfully in the United States in ways which minimize income taxation while alive and U.S. estate tax taxation at death.
Expatriation: renouncing U.S. citizenship. All U.S. persons–U.S. citizens and permanent residents (green card holders)–are subject to U.S. income taxation and information reporting obligations (such as FBAR filings) even if no longer living in the United States. For many U.S. persons, the ultimate tax planning strategy is to renounce citizenship and terminate lawful permanent residency. By taking the appropriate actions, individuals can leave the U.S. tax system when they leave the United States. However, doing so can trigger an exit tax. With proper planning, U.S. persons can successfully expatriate while avoiding, minimizing, or at least deferring the U.S. exit tax.