Global real estate investment is prevalent, serving not only to generate returns but also to mitigate risks and optimize asset allocation. However, the intricate and varied tax regulations regarding real estate investment across different countries can be overwhelming for investors. Experts from WorldWay explain that U.S. property tax is paid annually and is levied on the property owner; therefore, regardless of whether the client is a U.S. citizen, a local resident (i.e., a Green Card holder), or a foreign national, owning local real estate requires the payment of property taxes. Depending on the city, the tax details may vary; generally, the annual tax amount is approximately 1%-1.5% of the purchase price.
The following is a brief introduction to U.S. real estate taxes for your reference. For specific personal real estate tax issues, please consult a qualified attorney or accountant for professional services.
I. Types of Real Estate Taxes
A. Property Tax (Including House and Land Tax)
When you conduct a real estate transaction in California, the county government will dispatch personnel to re-evaluate the value of the property based on its current condition and the transaction price. The land and house taxes for the property will be calculated based on this re-evaluated value. The sum of your land and house taxes is approximately 1% of the purchase price, plus community bonds approved by local residents. The most common bond in California is the "Mello-Roos" bond, which requires a 2/3 majority vote from local residents to be levied. Mello-Roos tax revenue is used to fund local infrastructure and services, including the construction and improvement of schools, roads, community libraries, as well as police, fire, and emergency services.
B. Supplemental Tax
Supplemental Tax is a portion of the U.S. property tax levy and is different from the land appreciation tax understood in mainland China. California tax law stipulates that when a real estate transaction is completed and the transfer procedures are finalized, or when new construction is completed, tax authorities have the right to re-evaluate the value of the property. Since the re-evaluated value is often higher than the original price, the tax authorities have the right to levy a supplemental tax on the difference in the property value for that fiscal year (i.e., the year of the transaction or completion). Conversely, in rare cases where the re-evaluated property price is lower than the original estimated price, the tax authorities will refund the taxpayer for the overpaid tax. Generally, after the land transaction is completed, the property owner will receive 1 to 2 supplemental tax notices (see attachment). The calculation method for the relevant amount is as follows:
Supplemental Tax Amount = Tax Rate x (Difference between Re-evaluated Property Value and Original Assessed Value) x Time (Proportion of days from the transaction date to the end of the fiscal year relative to the total days in the year)
C. Foreign Investor Withholding Tax
The Foreign Investment in Real Property Tax Act (FIRPTA) is a U.S. federal tax law aimed at reducing tax evasion by non-permanent resident foreign nationals and foreign corporations. Under this act, any buyer purchasing U.S. real estate from a foreign seller must withhold 10% of the total purchase price and remit this tax to the U.S. Internal Revenue Service (IRS) within 20 days after the transaction. When remitting this tax, the buyer must complete forms "8288" and "8288A," which are the withholding tax return forms for foreign sellers of real estate. A foreign buyer who fails to withhold this tax may be subject to a fine of up to USD 10,000. During a real estate transaction, the escrow company usually provides the necessary forms and acts on behalf of the foreign buyer/seller to withhold the tax and remit it to the U.S. Internal Revenue Service.
II. §1031 Exchange (Tax-Deferred Exchange)
A. What is a Tax-Deferred Exchange
A 1031 exchange, also known as a "Like-Kind Exchange," is a win-win tax law in the United States that encourages investors to continue "reinvesting" their original real estate investment capital back into the real estate market after it has appreciated (excluding self-use properties) in exchange for the right to defer capital gains tax, thereby stimulating the real estate market. Through an exchange (one-for-many or many-for-one), investors do not receive cash or capital gains, but they enjoy the advantage of deferring capital gains tax (if any profit is made), allowing their investment to grow tax-free. However, this tax must be paid when all properties are eventually sold and the investor ceases to continue the exchange investment.
When exchanging real estate, to avoid capital gains tax, the exchanger should:
1. Ensure the net purchase price of the new property is greater than or equal to the sale price of the sold property.
2. Invest the entire net proceeds from the sale of the property into the purchase of the new property.
3. Ensure the mortgage on the newly purchased property is greater than or equal to that of the sold property.
B. Benefits of a Tax-Deferred Exchange
1. Deferral of capital gains tax
2. Repositioning of assets
3. Changing the type of investment property
4. Increasing real estate investment leverage (using a small amount to control a larger asset)
5. Increasing depreciation tax deductions
6. Planning for retirement and assets
7. Achieving the goal of consolidating properties or diversifying investments
