Foreign Investor Bought Rental Property in CA

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dtee
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Joined: Fri Nov 11, 2016 4:48 pm

Foreign Investor Bought Rental Property in CA

Post by dtee » Tue Oct 08, 2019 11:49 pm

Hi,
I would like to ask this community some questions for family relatives who live in a foreign country. They recently purchased a rental property in CA with cash and no mortgage. The title of the property is under their names (husband and wife). They have set up bank accounts here in the state already. They are very well-established in their country and wanted to diversify their investment in this country. My dad is currently acting as the “property manager” where he would collect money for my family relative and triage the issues if they come up. He’s retired so this is not an issue for him.

These are the questions they would like to know:
1. The rental property ($2800/month) is paid in a form of a check. If the check is deposited into their bank accounts, will this have to be reported? I believe they do but please let me know if I’m wrong.

2. When it comes to tax return each year, do they have to be physically present in this state to file it? Is anybody familiar with this process for a foreign investor? The challenging part is that they cannot be physically here in this country all the time since they have to obtain a visa.

3. What is the best way to protect themselves from liability in case anything happens? Create an LLC? Is this the best route since LLC fee in CA is $800 on annual basis.

Any thoughts and comments to these questions are greatly appreciated. Thank you

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ray.james
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Re: Foreign Investor Bought Rental Property in CA

Post by ray.james » Wed Oct 09, 2019 1:44 am

1) correct
2) No need for physical presence. They need to obtain ITIN and e-file/mail for both state and federal. A lot of this depends on whether this country has DTAA(Double taxation avoidance agreement) with USA. They will owe taxes as per non resident rules. 1040NR, 540NR.
3) No idea in this area, but LLC will increase complexity quite a bit with taxation, income reporting and rules.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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sk2101
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Re: Foreign Investor Bought Rental Property in CA

Post by sk2101 » Wed Oct 09, 2019 5:41 am

The prior poster already covered the tax questions, so regarding the asset protection besides an LLC they could do an umbrella policy. But realistically, since it looks like the property is their only asset in the US and unless they are looking to acquire other assets they are naturally protected. No one will go after their assets in a foreign country.

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Watty
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Re: Foreign Investor Bought Rental Property in CA

Post by Watty » Wed Oct 09, 2019 6:10 am

dtee wrote:
Tue Oct 08, 2019 11:49 pm
I would like to ask this community some questions for family relatives who live in a foreign country. They recently purchased a rental property in CA with cash and no mortgage. The title of the property is under their names (husband and wife).
If they are not US citizens then they need to be very concerned about the eventual estate tax when they die since they would only have a $60K exemption, not the $11 million exemption that US citizens living anywhere or legal resident aliens have.

https://en.wikipedia.org/wiki/Estate_ta ... -residents

The US federal estate taxes can be very high, up to 40%, and there can be state estate or inheritance taxes in addition to that. It is usually recommended that non-US citizens who are living abroad not own significant property or hold investment accounts in the US.

They should also look into how the title to the property will be passed on to their estate when they die and how the probate process will work for their US accounts. They may want to get wills that are valid in the US.

The rental income will be taxable to them but they will be able to deduct a number of expenses and depreciation. They will need to file both federal and state tax returns each year.

Frankly they really should have researched the tax issues before they bought the property.

They should get some expert tax advice from an accountant that is familiar with international tax issues to see if there is a way to mitigate the estate tax issues. There may be tax treaties with the country they are in so which country they are in could also make a difference.

Buying the property may have been a mistake.

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HueyLD
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Re: Foreign Investor Bought Rental Property in CA

Post by HueyLD » Wed Oct 09, 2019 6:39 am

A lot of international investors own real estate in California and that has been going on for decades.

The OP's relative needs to seek professional assistance from those who know California law. It can certainly be done properly and profitably, but online opinions from those who do not have such expertise is a very dangerous route to ask for help.

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sk2101
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Re: Foreign Investor Bought Rental Property in CA

Post by sk2101 » Wed Oct 09, 2019 8:47 am

Watty wrote:
Wed Oct 09, 2019 6:10 am
The rental income will be taxable to them but they will be able to deduct a number of expenses and depreciation. They will need to file both federal and state tax returns each year.

In order to be able to deduct expenses and depreciation they need to file an election to treat the rental as Effectively Connected Income. This needs to be done on the first year return, or the opportunity is lost. Otherwise, all the income is taxable without any allowable deductions - not good.
HueyLD wrote:
Wed Oct 09, 2019 6:39 am

The OP's relative needs to seek professional assistance from those who know California law.

You make an excellent point, they need professional tax advice on this one, but I would seek someone who specializes in non residents and estate planning. The point made by Watty regarding the lower exemption for foreigners is 100% on target. There are ways around it, but it can get expensive and it is probably not worth it for the value of this property, so they need to consult with a professional.

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dtee
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Re: Foreign Investor Bought Rental Property in CA

Post by dtee » Wed Oct 09, 2019 10:49 am

Thank you all for the guidance. Everyone make great points about estate planning and tax services.
Yes, a professional tax expert would be the best place to seek for these type of questions.
I figure this would be a great place to jump start the discussion and see where it would go.

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