Property taxes for international buyers in the USA

Looking to buy a home in the United States as a foreign investor? Not a problem. Anyone can buy a home in the U.S. regardless of residency or citizenship status. In fact, foreign investment in U.S. properties totaled $78 billion during 2019.

But, even non-residents who own a property in the United States must adhere to the same laws and taxes as American citizens. The Internal Revenue Service (IRS) requires all homeowners in the U.S. to pay property taxes.

This article discusses property taxes and other common expenses you can expect to pay when buying a home in the U.S. Let’s dive right in, shall we?

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Common Expenses When Buying a Home in the U.S.

One of the largest expenses you’ll pay on your home in the United States is property tax. This tax is different in all 50 states and the District of Columbia (Washington DC).

The state, local counties, and municipalities all help to determine property tax rates. Everyone is involved because the money from property taxes goes to local schools, water and sewer services, city and state worker’s salaries, transportation services, and more.

Property taxes are divided amongst the city and the state. For instance, in California, the state property tax rate is 1% of the home’s assessed value. And the cities and counties usually charge somewhere between 0.25% to 0.5%. However, the effective rates for the Country’s in California are usually less than 1% because the effective rate includes exemptions which help lower the overall tax rate.

Here are some examples of the effective property tax rates in California: • Santa Clara County = 0.745% • Los Angeles County = 0.755% • San Diego County = 0.757% • San Francisco County = 0.649% • Santa Rosa County = 0.722%

Compared to the rest of the country, California has the 16th lowest property tax rate. However, it’s important to note that home prices in California are among the highest in the nation. And the purchase price of your home is used to calculate property tax.

In the years following your purchase, the property tax is calculated by taking the assessed value of your home, multiplied by the tax rate.

How to Calculate Property Taxes on a Home in San Diego, California

Let’s say the assessed value of your home in San Diego, CA is $500,000. The average (effective) tax rate in San Diego County is 0.757%.

The calculation to determine your annual property tax expense is as follows:

$500,000 x 0.757% = $3,785 for the year

How Are Home Values Assessed?

When you buy a home, the assessed value equals the purchase price. But, going forward, the county board of assessors determines the value of your property each year.

In addition, the state of California won’t allow the assessed value of a home to increase by more than 2% from one year to the next. In this way, California homeowners can more easily estimate their property tax liability year over year.

Tax Implications Based on How You Use Your U.S. Home

Before buying a home in the United States, it’s important to consider its primary use. Here are a few ways foreigners use their homes in the U.S.

Vacation Rental

If you plan to rent your home for more than 14 days per year, the U.S. federal government requires you to report yearly rental income (or loss). You’ll file under Form 1040NR if you purchased the property under your name and Form 1120-F if purchased under a business entity.

Living in the Home

When you live in your home for longer than 121 days, the IRS considers you a resident for tax U.S. income tax purposes under the Substantial Presence Test. Therefore, they’ll require you to pay taxes on your worldwide income. This is not an ideal situation.

However, you can avoid double taxation, if your home country has a Tax Treaty with the U.S. For more information on taxation, consult with a tax attorney or advisor in your local jurisdiction.

Occasional Personal Use

If you’re buying a home in America strictly as a personal vacation home that you visit a handful of times a year (less than 121 days), then you don’t have to file a rental income tax return or report your worldwide income. Yet, property taxes, homeowners insurance, and other routine fees are still compulsory.

In Summary

Everyone who owns a home in the United States must pay annual property taxes, including non-residents. There are other fees involved in buying a home, but some are one-time fees, while others are recurring, as is the case for property taxes.

Depending on the use of your property, you may or may not have to pay taxes on your rental income. Also, if you plan on living in America for more than one-third of the year, you could be subject to double taxation. As always, consult with your tax lawyer and other financial advisors before purchasing a home in the U.S.