Succession Laws and Inheritance Tax
Owner Occupier home ownership in the United States of America has risen from
48% to 64% since the Second World War. This is entirely due to a real increase
in incomes, preference for suburban living, the availability of credit and the
opportunity for equity accumulation and capital gains associated with property
Foreign ownership of United States real estate has grown dramatically since
the early 1980’s particularly on the Eastern Seaboard and Florida. It is
important, however, that consideration should always be given to the method and
route of ownership to avoid or to mitigate the impact of capital gains tax,
estates taxes and double taxation.
In the United States individuals and corporations pay income tax on the net
total of all their capital gains. The tax rate for “long term capital gains”
i.e. assets that had been held for more than one year prior to sale was reduced
in 2003 to 15% and to 5% for individuals in the lower income tax brackets. Short
term capital gains are taxed at a higher rate, the ordinary tax rate. In 2013
the reduced long term tax rates will be governed by a “sunset” clause and will
revert back to the rates in effect in 2003, which were 20%.
Assessment for capital gains is calculated on a “cost basis” to determine the
taxable amount of the gain. The cost basis is the original purchase price,
adjusted for improvements, fees and depreciation.
Real estate transactions are entirely governed by state law. Unlike many
other foreign countries, the United States does not impose significant
restrictions on the ownership of real estate by foreigners. One main difference
however is in the manner in which capital gains tax is collected. U.S. citizens
and residents ordinarily report capital gains in their tax returns. Non-resident
aliens, however, pay a percentage of the sale proceeds to the U.S. Internal
Revenue Service and then subsequently file accounts relating to the property in
order to claim any refund that may be due.
A non resident alien person of the United States is potentially subject to
U.S. estate tax if he dies whilst directly owning U.S property including real
estate, equities and bonds etc. The concern for foreigners is that whilst
resident owners of U.S. property enjoy an exemption of between US$1,000,000 and
US$3,500,000 (2009) non resident alien persons can only benefit from an
exemption of US$60,000. The current rates of Federal estate tax range from
between 18% and 55%. Therefore secondary homes owned by non resident aliens can
often be subject to estate tax. In addition to this, relief between spouses is
only granted if the surviving spouse is a United States citizen. For example,
where a U.S. property is owned directly by a married couple who are non U.S.
citizens and are ordinarily resident in a European Country and where one of the
spouses dies, there would be a liability to federal estate tax based on the
property’s market value. In the case of a property worth US$500,000 the
liability would be approximately US$150,000.
Many foreigners of the United States are not familiar with the various laws
relating to estate taxes and should be aware that if ownership is structured
properly through a non U.S. corporation, trust or foundation, the liability to
U.S. estate taxes can be legally avoided.
A bespoke 'offshore' solution can be complex and requires careful planning
and execution. We therefore encourage our clients to contact us directly,
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Consultation, the consultants listed below have particular expertise in this
area and will gladly assist with advice on how to approach your unique
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