Tax / best structure on US Rental Property while in Oz?

[RedneckGeek]

Howdy -

I'm a US citizen and have been living in Oz for 14 years, and am considering purchasing an investment property in the US.

If I purchase an investment property that is "negatively geared" (expenses are greater than the income), the Australian Tax Office (ATO) allows me to deduct the annual loss from my taxable salary. For example:

Expenses: US$12,000 (interest, maintenance, etc.)
Income: US$10,000 (rent)
Loss: US$-2000

Assuming that 1 AUS$ = 1 US$ for this tax year:

Taxable Salary: AUS$100,000
Less loss: AUS$-2000
Taxable Salary in AUS$98,000

Tax paid to ATO: AUS$35,000 (approx)

Would I be liable for any tax on the rental income that I receive in the US even though it's less than the rental income?

Since I would (hopefully) pay more tax on my total income in Australia, would my net tax due to the IRS be zero?

If I sell the property at least at least one year later for a profit, the ATO then takes their bite out of my capital gains at my tax rate (less 50% for holding it >12 months):

Purchase price: US$100,000
Sale price: US$150,000
Capital gain: US$50,000

Capital Gains Tax payable to ATO: US$50,000*0.45 *0.5 = US$1125
(gain * top tax rate less 50% for holding an asset for a year)

Assuming AUS/US$ parity and I get a bit of a raisle, my ATO tax would be:

Tax on Salary of AUS$110,000: $40,000
+ Capital Gains Tax: $ 1125
Total tax paid to ATO: $41125

Would I be liable for any additional tax to the IRS?

I do understand that there is a US Foreign Income Exclusion (now showing up as $87,600 on IRS form 2555). Is there another IRS form for expats paying more tax in the foreign country than they would in the US?

If this is too complicated an issue to answer here, do you know of any good tax accountants familiar with US/Aus tax issues?

Thanks in advance,

RedneckGeek

"You might be a redneck if yer family tree don't branch!" - Jeff Foxworthy

[kaz101]

Welcome RedneckGeek.

Wow what a first post! Hopefully some of our members that have moved to Australia from the USA can point you in the direction of a good tax accountant since I think you need professional advice.

We moved from the UK to Australia and we had to get professional advice since we had investment properties in the UK and Australia.

Out of curiosity what's the benefits of staying a US citizen when you've lived here in Australia for 14 years?

Regards,
Karen

[amaslam]

Hi RNG:

Too hard for a simple yes/no. Professional accounting advice is needed here.

TBH I can only think of places like Ernst and Young or PriceWaterHouse Coopers for this sort of thing as they have tax departments who deal with this regularly. I don't personally have an accountant who can deal with both sides of this equation, but you could possibly talk to H&R Block USA if they can handle it.

Originally Posted by RedneckGeek

Howdy -

I'm a US citizen and have been living in Oz for 14 years, and am considering purchasing an investment property in the US.

If I purchase an investment property that is "negatively geared" (expenses are greater than the income), the Australian Tax Office (ATO) allows me to deduct the annual loss from my taxable salary. For example:

Expenses: US$12,000 (interest, maintenance, etc.)
Income: US$10,000 (rent)
Loss: US$-2000

Assuming that 1 AUS$ = 1 US$ for this tax year:

Taxable Salary: AUS$100,000
Less loss: AUS$-2000
Taxable Salary in AUS$98,000

Tax paid to ATO: AUS$35,000 (approx)

Would I be liable for any tax on the rental income that I receive in the US even though it's less than the rental income?

Since I would (hopefully) pay more tax on my total income in Australia, would my net tax due to the IRS be zero?

If I sell the property at least at least one year later for a profit, the ATO then takes their bite out of my capital gains at my tax rate (less 50% for holding it >12 months):

Purchase price: US$100,000
Sale price: US$150,000
Capital gain: US$50,000

Capital Gains Tax payable to ATO: US$50,000*0.45 *0.5 = US$1125
(gain * top tax rate less 50% for holding an asset for a year)

Assuming AUS/US$ parity and I get a bit of a raisle, my ATO tax would be:

Tax on Salary of AUS$110,000: $40,000
+ Capital Gains Tax: $ 1125
Total tax paid to ATO: $41125

Would I be liable for any additional tax to the IRS?

I do understand that there is a US Foreign Income Exclusion (now showing up as $87,600 on IRS form 2555). Is there another IRS form for expats paying more tax in the foreign country than they would in the US?

If this is too complicated an issue to answer here, do you know of any good tax accountants familiar with US/Aus tax issues?

Thanks in advance,

RedneckGeek

"You might be a redneck if yer family tree don't branch!" - Jeff Foxworthy

[Bevdeforges]

Originally Posted by RedneckGeek

Would I be liable for any tax on the rental income that I receive in the US even though it's less than the rental income?

Since I would (hopefully) pay more tax on my total income in Australia, would my net tax due to the IRS be zero?

If I sell the property at least at least one year later for a profit, the ATO then takes their bite out of my capital gains at my tax rate (less 50% for holding it >12 months):

Purchase price: US$100,000
Sale price: US$150,000
Capital gain: US$50,000

Capital Gains Tax payable to ATO: US$50,000*0.45 *0.5 = US$1125
(gain * top tax rate less 50% for holding an asset for a year)

Assuming AUS/US$ parity and I get a bit of a raisle, my ATO tax would be:

Tax on Salary of AUS$110,000: $40,000
+ Capital Gains Tax: $ 1125
Total tax paid to ATO: $41125

Would I be liable for any additional tax to the IRS?

I do understand that there is a US Foreign Income Exclusion (now showing up as $87,600 on IRS form 2555). Is there another IRS form for expats paying more tax in the foreign country than they would in the US?

First of all, the Overseas Earned Income exclusion will NOT apply to anything related to a rental property located in the US. It only applies to earned income (i.e. salary). Rental property income (including capital gains on sale) is subject to regular old US IRS taxes and rates, less perhaps a foreign tax credit for taxes paid to another country on the transaction. (But only those taxes that apply to the rental property transaction - not your overall taxes.)

If you wind up paying more in your country of residence than you would have in the US, that's your tough luck. There's no way to claim back that on your US taxes.

Actually, depending on the tax treaty with Australia, I'd suspect that you pay US taxes on rental income from a property located in the US before you can apply any tax advantages of the Australian tax system - but you'd best check that with a tax expert. Like amaslan has already suggested, you may need to talk to one of the big 4 or 3 or however many of them are left - the big international accounting firms that handle international taxes all the time.
Cheers,
Bev

[Bevdeforges]

Originally Posted by kaz101

Out of curiosity what's the benefits of staying a US citizen when you've lived here in Australia for 14 years?

Just for the record, it's very difficult to renounce US citizenship, no matter how long you've lived elsewhere. As a US citizen, you're subject to US income taxes forever - and if you voluntarily renounce your citizenship and it's believed to be "for tax reasons" they can slap you with another 10 years of filing US tax returns, plus other penalties.
Cheers,
Bev

[RedneckGeek]

Thanks very much, Bev, Amaslam, and Kaz!

Especially the advice regarding the Overseas Earned Income Exclusion not applying. The other thing that really helped was "tax credit" - I'm fairly sure that any tax I pay to the US would be a credit against anything I owe to the ATO - I'll verify that myself.

I'll look into Price Waterhouse and E&Y - thanks!

And I was aware that trying to renounce one's US citizenship usually raises eyebrows at the IRS. Personally, my main reason is that I plan on spending some of my retierment living back there, and also want to give my kids the opportunity to work in the US if they ever want to.

I did have one other question relating to this that I forgot to mention in my original post: Is there any advantage to purchasing the property with one of my relatives in the US? In Australia this can be done as "Joint Tennants" (where each partner owns half, and if one dies, the other becomes the sole owner) or as "Tennants in common" (where each partner owns a certain percentage, and if one dies, the ownership of their share is allocated according to their will, or to their descendents in the absence of a will). In either case, would I be correct in assuming that I would be taxed on the portion of the property which I owned?

Thanks again,

RNG



Thanks again!

[Bevdeforges]

Originally Posted by RedneckGeek

I did have one other question relating to this that I forgot to mention in my original post: Is there any advantage to purchasing the property with one of my relatives in the US? In Australia this can be done as "Joint Tennants" (where each partner owns half, and if one dies, the other becomes the sole owner) or as "Tennants in common" (where each partner owns a certain percentage, and if one dies, the ownership of their share is allocated according to their will, or to their descendents in the absence of a will). In either case, would I be correct in assuming that I would be taxed on the portion of the property which I owned?

This is where you run into problems with the differing laws in each of the 50 states. It depends on the state where your property is located.

In some states, you can only have a "joint tenancy with survivorship of the whole" (or some such fancy title) with your spouse. For all other cases, the joint tenancy has to be split in identifiable shares, depending on who contributed how much of the money for the purchase. In essence, unless you're buying the property with your spouse, you have a sort of de facto partnership.

A few states may allow you to have that sort of joint tenancy with a family member, but not usually with a non-related party. Best to check with a local real estate attorney because each state has its own peculiarities in the law.
Cheers,
Bev

[kaz101]

Originally Posted by Bevdeforges

Just for the record, it's very difficult to renounce US citizenship, no matter how long you've lived elsewhere. As a US citizen, you're subject to US income taxes forever - and if you voluntarily renounce your citizenship and it's believed to be "for tax reasons" they can slap you with another 10 years of filing US tax returns, plus other penalties.
Cheers,
Bev

Wow that's tough if you really don't intend to return.

[Bevdeforges]

Originally Posted by kaz101

Wow that's tough if you really don't intend to return.

Yeah, once an American, always an American... Not really sure why they are so fanatic about it.
Cheers,
Bev

[amaslam]

C'mon Bev, it's all about the Benjamins

Can't have too many Americans enjoying tax-free income now can we

I think this is the reason my spouse hasn't gone for PR in the US yet, the whole tax thing for life (hey I don't even live there and I gotta pay?!?!??)

Originally Posted by Bevdeforges

Yeah, once an American, always an American... Not really sure why they are so fanatic about it.
Cheers,
Bev