Foreign Nationals in the U.S. – Invest AND Protect Your Assets
by R. Scott Jones, Esq., GOLDSTEIN JONES LLP
The U.S. real estate market has arguabl y gained in investment appeal in the last twelve months or so due to the downturn in the market. Indeed, its lustre shines ever brightly for some foreign investors due to exchange rate considerations and the relatively low long- term federal capital gains rate at 15%. Even on a revenue basis, the deductibility of mortgage interest and real estate taxes (subject to Alternative Minimum Tax restrictions) is a compelling reason to buy for some foreign nationals living in the U.S. for a period of even just a few years.
Do the foreign national investors know, however, that the full value of their U.S. home could be exposed to U.S. federal estate tax rates of up to 45%! Are they aware that certain states also impose “death” taxes on assets situated within their state?
Domicile Reigns
Upon the death of one who is not “domiciled” in the U.S. (broadly defined to be someone whose permanent home is outside the U.S.) estate tax is imposed on all assets “situated” in the U.S. including but not limited to a principal residence or other real estate here. U.S. stock holdings and, if applicable, any U.S. pension or 401(k) investments may also be subject to estate tax. Estate tax definitions should not be confused with income tax treatment. It is perfectly possible – indeed common - for an individual regarded as resident for income tax purposes to be considered non-domiciled (sometimes similarly referred to as “nonresident”) for estate tax purposes. So what’s the issue?
What about the $2,000,000 individual estate tax exemption available to U.S. citizens and other U.S. estate tax residents (including most green card holders), and which will increase to $3,500,000 in 2009? Regrettably, foreign nationals not domiciled here do not qualify for any increase in exemption. Instead, the exemption available remains at a mere $60,000 with no legislative plans to increase the amount. Any applicable estate tax treaty between one’s home country and the U.S. may help, but there are special conditions to the application of all such treaties. Moreover, notwithstanding such treaties (of which there are less than twenty, unlike the plethora of income tax treaties) in-country real estate investments often remain exposed to U.S. estate tax liability.