One of the most overlooked issues when Koreans invest in U.S. real estate is taxes. When a Non-Resident Alien sells U.S. real estate, 15% is withheld from the sale proceeds under FIRPTA, and separate tax rules apply to rental income and inheritances.
What is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA) is a law that requires the buyer to withhold and pay a portion of the sale price to the IRS to secure capital gains taxes when a foreigner sells U.S. real estate.
- Withholding rates: 15% of the sale proceeds (with some exceptions)
- Applies to: Nonresident aliens, foreign corporations selling U.S. real estate
- Who owes money: Withheld by Buyer and paid to IRS
FIRPTA withholding exceptions
- If the sale price is $300,000 or less and the buyer purchases for residence: Exempt from withholding
- Sale price of $300,001 to $1,000,000 and buyer is Residential Purpose: Reduced to 10%
- Application for Reduction of Withholding (Withholding Certificate, 8288-B): When the actual gain is less than the withholding amount
Taxing rental income
Rental income from U.S. real estate for nonresident aliens is taxed in two ways:
Method 1: Gross income taxation (basic)
Withhold 30% on gross rental income. No deduction for expenses.
Method 2: Tax net income (IRC §871(d) election)
If you elect to have “effectively connected income” (ECI) with your U.S. business, you'll pay ordinary tax rates on your net income after deducting expenses (mortgage interest, property taxes, depreciation, and administrative expenses). In most cases, this is favorable.
Inheritance tax issues
When a nonresident alien dies while owning U.S. real property:
- Exemption limits: $60,000 (extreme difference from US citizen's $13.61M)
- Tax rates: Up to 40% on tax-free excess
- Target: All properties located in the United States
Tax-saving strategies
- Holding through an LLC: A foreign one-person LLC is a disregarded entity for tax purposes and cannot avoid FIRPTA. However, it can be used for estate tax planning
- Holding through a foreign entityAvoids FIRPTA withholding, but corporate tax and Branch Profits Tax must be considered
- Leveraging the U.S.-Korea Tax Treaty: Avoid double taxation, reduce tax rates
- Timely tax filing: If your withholding is more than your actual taxes, you'll get a refund when you file your taxes.
Frequently asked questions
Q. If I buy a U.S. property in Korea, do I have to pay taxes in Korea?
South Korean tax law requires residents to file a capital gains tax return in South Korea when they sell real estate abroad. However, under the U.S.-South Korea tax treaty, taxes paid to the U.S. can be deducted from Korean taxes to avoid double taxation.
Q. Can I get my FIRPTA withheld money back?
Yes. If the tax on the actual capital gain is less than the amount withheld, then you can get a refund of the difference on your U.S. tax return (Form 1040-NR) the following year. You can also apply for a Withholding Certificate (8288-B) before the sale to reduce your withholding upfront.
Plan your US real estate investment, taxes and all. For a FIRPTA and real estate tax consultation, contact the Law Offices of Jin Dong Cho.
Phone: (718) 353-2699 | Email: jd@choattorneys.com
