When buying property in the U.S., it’s important to understand its tax rules. Taxes will affect your budget and help you decide if investing in U.S. real estate is a good choice for you in the long run. They can also influence your rental income or overall profits if you rent out the property.
Here’s a simple overview:
- Expect to pay 0% to 4% of the property price in taxes upfront when buying.
- Annual property tax can be up to 2.5% of the property’s value.
- Income tax starts at 10% if you rent the property.
This guide explains the main property-related taxes for UK buyers interested in U.S. real estate.
Initial Tax Considerations
Before diving into specific taxes, here are a few points to consider.
The UK-USA Tax Treaty
The UK and U.S. have a double taxation agreement to avoid paying taxes twice on the same income.
For property buyers this mostly applies to rental income or profits from selling the property. Under the treaty, you can claim tax credits to offset taxes paid in the U.S. against what you owe in the UK. For example, if you pay income tax on U.S. rental earnings, you can claim a credit against your UK tax bill.
Reporting Requirements in the UK and U.S.
You must report property income or gains to both the U.S. Internal Revenue Service (IRS) and HM Revenue & Customs (HMRC) if you’re a UK resident.
In the U.S., file Form 1040-NR to report income or capital gains. In the UK, include it in your Self Assessment using SA106.
Keep in mind the different tax year calendars:
- UK tax year: 6 April – 5 April
- U.S. tax year: 1 January – 31 December
Managing those requirements can feel overwhelming. So working with a tax expert is a smart choice.
Key Taxes for UK Buyers of U.S. Property
With the basics in mind, let’s explore the U.S. property taxes you’ll encounter when buying property there.
Property Transfer Taxes
When buying property in the U.S., one of the key costs to consider is the property transfer tax, which is charged by state or local governments.
How Much is U.S. Property Transfer Tax?
The rate of transfer tax varies significantly, from 0% to 4%, depending on the state and sometimes the city.
- States with no transfer tax: Missouri, Kansas and Texas.
- Highest transfer tax: Delaware, with rates up to 4% of the property’s sale price.
Even within a single state, rates can differ. For example, in New York the tax ranges from 0.4% to 2.9%, depending on property value and location.
Who Pays the Transfer Tax?
Who pays this tax depends on local customs and the sale agreement. In some places, the seller covers the state tax while the buyer pays any city tax. Negotiating this is a standard part of the property transaction process.
Recording Fees
In addition to transfer taxes, buyers pay a fee to record the property sale with the local government.
- Typical fee: $10 to $50.
- Complex transactions: Fees can range from $200 to $1,000.
Ongoing U.S. Property Taxes
After buying a property, there are ongoing taxes you’ll need to budget for:
Property Taxes
Property tax is an annual cost based on the property’s assessed value. Rates range from 0.3% to 2.5%, depending on the county and state.
Payments are made annually, semi-annually, or quarterly, depending on the area.
Tax on Rental Income
- If you rent out your property, the income is subject to federal income tax.
- Tax brackets start at 10% for earnings up to $11,000 and rise to 37% for earnings over $578,126.
- Deductible expenses: You can claim deductions for costs like mortgage interest, property maintenance, and management fees.
- You may also need to pay state income tax, which varies widely. Some states don’t charge income tax, while others impose rates as high as 10% to 13%.
Understanding these taxes will help you plan your investment and avoid surprises down the road.
Taxes When Selling Your U.S. Property
Selling a property in the U.S. comes with important tax rules you need to know. These taxes can impact your profits and should be part of your planning, whether you already own a property or are thinking about selling in the future.
Capital Gains Tax on U.S. Property
When you sell a property in the U.S., you may be subject to capital gains tax. There are two types, depending on how long you’ve owned the property.
1. Short-Term Capital Gains
- Applies if you’ve owned the property for one year or less.
- Taxed at regular income tax rates, along with your other taxable U.S. income.
2. Long-Term Capital Gains
- Applies if you’ve owned the property for more than one year.
- Taxed at lower rates: 0%, 15%, or 20%, depending on your taxable income.
2024 Tax Rate Thresholds for Long-Term Gains
- 0%: Taxable income up to $47,025 (single) or $94,050 (married filing jointly).
- 15%: Taxable income between $47,026 and $518,900 (single) or $94,051 and $583,750 (married filing jointly).
- 20%: Taxable income above $518,900 (single) or $583,750 (married filing jointly).
Example
If you sell a property for $600,000 that you bought for $500,000 two years earlier, your long-term capital gain is $100,000. If your taxable income places you in the 15% rate, you’ll owe $15,000 in capital gains tax.
Foreign Investment in Real Property Tax Act (FIRPTA)
As a foreign seller, FIRPTA requires the buyer to withhold 15% of the sale price to cover potential federal capital gains tax.
- The withheld amount is sent to the IRS.
- After the IRS calculates your actual tax liability, you can claim a refund if the withholding surpasses your tax due.
Example
1. You sell a property for $600,000. FIRPTA requires $90,000 (15%) to be withheld.
2. Your long-term capital gain is $100,000. At a 15% tax rate, you owe $15,000 in tax.
3. You can claim a $75,000 refund from the IRS ($90,000 withheld – $15,000 owed).
Knowing these taxes and how they affect you can help you plan your property sale and get the best return. It’s a good idea to work with a tax expert to understand U.S. tax rules and stay compliant.
