Investing in US property? Consider the tax consequences and plan appropriately

Over the last few years, there has been a surge in Australian investors looking to acquire both residential and commercial US property. There seems to be a few key reasons as to why.

At least initially, the appreciation in the Australian dollar against the US dollar and the dramatic reduction in US property values during the Global Financial Crisis made US property look attractively priced for Australian investors.

Since then, other factors have come to the fore. More sophisticated investors are increasingly looking to diversify their portfolio, which has traditionally focused primarily, if not entirely, on Australian assets. Furthermore, US property assets often provide more attractive rental yields, particularly when compared to Australian residential yields.

Tax implications for foreign property investors in the US

However, with any offshore property investment, in the US or elsewhere, the tax considerations need to be addressed.

For foreign property investors, the US is quite a high tax jurisdiction, when both Federal and relevant State income taxes are taken into account. This is further compounded by the fact that capital gains tax is generally payable by foreign investors on profits arising from the disposal of US property.

These high taxes can potentially make a US investment commercially unattractive, particularly for Australian self-managed superannuation funds with very low, or zero, rates of Australian tax and Australian individuals that can access the discount capital gains tax concessions.

Some approaches to consider

Consequently, Australian investors must closely examine their structuring into US property. Some potential strategies that may push down the effective US tax rate could include:

  • The appropriate implementation of related party lending to provide interest deductions against US taxable income
  • The use of ‘fiscally transparent’ structures with the aim to let ‘tax deferred distributions’ (generally arising from depreciation deductions) arise and making credits available in Australia for US income taxes paid
  • Whether appropriate ‘blocker’ entities (generally treated as corporates for US tax purposes) should be considered. This often involves a trade-off between (a) higher US corporate tax rates compared to individual tax rates and (b) greater tax compliance complexities for individual investors.

As with any significant investment it will also be important to take Australian tax considerations into account. With foreign property investments, the Australian Taxation Office will often focus upon:

  • Confirming that all assessable foreign property income is returned as taxable in Australia (after conversion to AUD)
  • Whether credits for foreign taxes have been correctly claimed
  • Whether discount CGT concessions (on disposal) have been correctly applied.

It’s obviously too early to say whether the recent US election result will have any bearing on the above, but we’ll watch this space closely and update you accordingly!

As always, tax payers should obtain specific tax advice relevant to their circumstances before entering into any particular arrangement.


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