Property Management Guide for Foreign Investors: What to Expect + Tax Implications

Investing in property in the United States offers significant opportunities for international investors. The U.S. real estate market is expected to grow at an annual rate of about 4.51% from 2024 to 2028, reaching a total value of $142.90 trillion by the end of 2028 (Statistia).

However, purchasing property in the U.S. involves navigating a complex landscape. This property management guide for foreign investors will help you understand the necessary legal structures, real estate laws, and strategies for managing a property investment business in the U.S., and how to protect your investment and reduce your tax liabilities.

How to Effectively Manage Properties Remotely

Managing properties from abroad requires building a reliable team, including property managers, a lawyer, and a CPA. The key roles you’ll need are a property manager, a lawyer, and a CPA.

Hire a Property Manager

A professional property manager handles rent, address maintenance issues, and tenant complaints. They also find new tenants and manage legal issues and paperwork. Working with experienced real estate professionals can ensure that your property is managed efficiently and in compliance with all relevant laws.

There are several property management companies in the U.S. Some popular options for residential portfolios include:

• Greystar Real Estate Partners
• Lincoln Property Co.
• Cushman & Wakefield
• Bozzuto
• BH Cos

Some options for commercial portfolios are:

• CBRE Group, Inc.
• Colliers International
• JLL
• Newmark Knight Frank
• Avison Young

Here’s a more in depth article on what a property management company does.

There’s also property management software. This software helps you keep track of payments, maintenance issues, and more, all from your computer or smartphone.

Here are some popular property management software options:

• DoorLoop
• AppFolio
• TenantCloud
• Hemlane
• LandlordStudio

Build a Trusted Team

To successfully manage your property remotely, you need to build a reliable team. This team should include:

• Skilled Lawyer
• Property Manager
• CPA that understand local and Federal laws that apply to your properties

When interviewing potential team members, inquire about their experience with similar cases or issues. Ensure they can explain complex matters clearly and that you can easily understand them. Effective communication is crucial, so choose someone who will keep you informed regularly.

Also, discuss their fees and preferred communication methods, including platforms, times or time zones, and frequency.

Can I Buy an Investment Property Through My Business

Yes, you can buy an investment property through your business. This method offers benefits like asset protection, tax advantages, and simplified management. Understanding the legal, financial, and regulatory aspects is essential to make the most of this approach.

Company Structuring

As a foreign investor in U.S. property, choosing the right entity to make the purchase is crucial. This decision helps protect your assets and can reduce your tax liabilities. The main options are:

• Corporation
• Limited Liability Company
• Limited Partnership

Each structure offers unique advantages, so it’s important to select the one that aligns best with your investment goals and legal requirements. Additionally, foreign investors should be aware of the Foreign Investment in Real Property Tax Act (FIRPTA), which mandates withholding tax on foreign individuals selling U.S. property.

Corporation

When you set up a corporation, the company technically owns the property. This means the company handles everything from designing and building to managing and maintaining the property. This structure can simplify taxes, loans, and future planning.

Corporations can own various types of properties, such as offices, stores, factories, and homes.

However, if the property is intended as a personal residence, buying through a corporation is not ideal due to the capital gains tax that applies when you sell.

Limited Liability Company

Starting a Limited Liability Company (LLC) allows you to move saved company earnings into this new entity to buy property. This structure helps separate the company's risks and potential legal complications from your property.

Setting up an LLC requires a one-time fee and ongoing annual costs for legal and accounting assistance. According to Forbes, the cost of forming an LLC can range from $150 to $4,000, depending on the state.

Source: Forbes

Limited Partnership

In a Limited Partnership (LP), you need at least one general partner and one or more limited partners. The general partner is fully responsible for any debts, while the limited partners are only liable up to the amount they invested.

LPs must be officially registered in most U.S. states.

If you want to start your own business, the U.S. Small Business Administration (SBA) provides a list of all state and federal permits required.

Tax Implications

Navigating tax implications can be challenging for foreign investors conducting real estate transactions in the U.S. real estate market.

Here are the basic implications based on your business model.

Passive Investments

When you rent out a property, like a house where the tenant pays for everything — rent, taxes, repairs, mortgage interest, and insurance — that's considered a passive income activity (IRS).

The money you make from this kind of foreign investment is taxed at a flat rate of 30%, unless a tax treaty says otherwise. This tax is taken from the total rent you earn, not just the profit after expenses. You also need to report Forms 1042-S and 1042.

Selling Property and Conducting Business

When selling property as a foreign investor in the U.S., the first thing you need is a taxpayer identification number (ITIN), a 9-digit number starting with "9" used for tax filing purposes. To get a ITIN, complete this IRS Form W-7, IRS Application for Individual Taxpayer Identification Number. You will also be charged a capital gains tax.

Capital gains tax on the sale of property ranges from 15% to 30% of the sale price. Additionally, the buyer (also known as the transferee and withholding agent) must determine if the seller (transferor) is a foreign person. If the seller is foreign and the buyer fails to withhold taxes, the buyer may be liable for the tax. The seller must report the property sale Form 1040-NR or Form 1120-F.

For foreign investors involved in business activities in the U.S., rental income is taxed differently. This income is not subject to withholding upfront and is taxed like regular income, with higher earnings subject to higher tax rates.

Foreign investors can deduct expenses such as mortgage interest, property taxes, and maintenance costs from their income before taxes. To deduct these expenses, the investor must file specific tax forms, such as Form 1120- F, on time each year.

Income Taxes

As a foreigner owning property in the U.S., you are required to file yearly tax returns, similar to U.S. residents.

Nonresident individuals use Form 1040-NR, and foreign corporations use Form 1120-F. his process can be complex, so it is recommended to seek guidance from a professional CPA or attorney to ensure compliance and proper filing.

Investing in U.S. property as a foreign investor is both challenging and rewarding. Understanding legal structures and managing tax implications are crucial for achieving your goals.

But with the right team, the chances of success are high.

If you want to learn more about DoorLoop, and how our property management software easily manages any U.S. property, schedule a free demo today!