The United States government levies a tax of one sort or another on just about any income earned within its borders. With this in mind, foreign nationals or entities in the United States can expect to pay tax not only on earned income from work or business activities, but also on investment profits, including realized capital gains.
Capital Gains Taxes and Tax Rates
The Internal Revenue Service levies capital gains taxes whenever a taxpayer sells an investment or a piece of capital equipment for a profit. In the 2011 tax year, the capital gains tax rate was 15 percent for gains earned on investments owned for at least one year. Short-term capital gains are taxed at the taxpayer's highest marginal income tax rate. Investment property sales are subject to capital gains taxes.
The Foreign Investment in Real Property Tax Act of 1980, usually referred to as FIRPTA, governs the sale of property by foreigners. It allows the government to withhold 10 percent of the proceeds of any sale of real estate by a foreigner to be applied to his tax bill. If he does not owe tax, such as if he sells at a loss, the withholding will be returned when he files his tax return in the next tax year.
Foreign Owners of U.S. Entities
Although FIRPTA applies to foreign entities that hold American assets, a United States corporation is not subject to FIRPTA even if it is held by foreigners. With this in mind, one way to avoid FIRPTA withholding is to set up a domestic entity. Foreigners who do this will need to file special paperwork regarding the foreign ownership of the corporation. Distributions from the U.S. corporation to its foreign owners can be subject to special withholding.
One way that domestic property owners avoid capital gains taxes is to do a 1031 tax-deferred exchange, where they take the proceeds from the sale and put it into a replacement property. Unfortunately, although foreign owners can defer their capital gain taxes with a 1031, they will still be subject to FIRPTA withholding. Getting around the provisions of FIRPTA requires that they apply for and receive special Withholding Certificates from the IRS.