Abstract:
- Generally, sellers will pay real estate agents a 6% commission, which is distributed to the buyer’s and seller’s agents.
- In Michigan, a home buyer used the hourly wage system and saved a high real estate agency fee. When buying a house in the United States, it is basically necessary to operate through a real estate agent. Generally speaking, the tax issues of new immigrants purchasing real estate in the United States can be considered from the following aspects.
First, when individuals invest in real estate in the United States, it is distinguished whether it is for self-occupation or investment. For self-occupation, there are four expenses that can be deducted when purchasing. 1. Real estate tax. 2. Sales tax. 3. Home loan interest. 4. Loan insurance premiums. The new tax law stipulates that the combined deduction limit for real estate taxes and state taxes is $10,000. When disposing of self-occupied housing, if it meets the requirement of cumulative residence for a total of 2 years in the past 5 years, an individual can enjoy a capital gain deduction of $250,000, and a couple can enjoy a deduction of $500,000. This clause can be reused, but it should be noted that it can only be used once every two years.
For investment housing, the US tax law has a special 1031 property exchange clause. This clause stipulates that when disposing of personal investment housing, as long as a new property is locked within 45 days and the transaction is completed within 6 months, the capital gain from the disposal of the original investment housing can be deferred to the new property. This clause can be applied repeatedly and infinitely. For example, if a property is purchased for $1 million and sold for $2 million, and a new property worth $2.5 million is purchased that meets the requirements of the above clause, then the previous $1 million capital gain can be deferred to the new property without paying any capital gains tax. Of course, if a third property is purchased after the disposal of the subsequent property and the requirements of the clause are met, it can be deferred to the new property, and so on, and capital gains tax can be deferred all the time. At the same time, the property exchange clause allows locking of up to three properties simultaneously, as long as it does not exceed 200% of the original value of the property.
Second, when purchasing real estate in the United States, it is necessary to consider whether to hold it in an individual’s name or a company’s name. The general principle is that if it is mainly for self-occupation, it is more common to hold it in an individual’s name. Specifically, holding real estate in an individual’s name has relatively simple procedures, is easy to manage, saves costs, and enjoys a capital gain deduction of $250,000 for individuals and $500,000 for couples. The disadvantages of individual holdings include potential unlimited personal liability and estate tax issues. The federal estate tax threshold for US tax residents is $11.2 million.
If real estate is held in the name of a company, the benefits are risk avoidance, no pursuit of personal assets, flexible management and distribution, and protection of personal privacy, etc. It is more suitable for professional real estate investors with a large number of properties. The disadvantages are relatively high costs, more cumbersome procedures, the need for professionals to participate in the preparation of financial statements, inability to enjoy the capital gain deduction of $250,000 for individuals and $500,000 for couples, and the tax rate when selling the house is usually higher than the individual tax rate. In addition, when investing in the name of a company, it is also necessary to distinguish whether it is held in the name of an LLC or a general C Corp. The income and expenses of the former are usually linked to the personal income tax return of the shareholders, avoiding double taxation. The benefit of the latter is that the new corporate income tax rate was reduced to 21% in 2018. However, if the company distributes dividends or pays wages to shareholders, the shareholders still need to pay personal income tax again on the personal income tax return. Therefore, the above issues all require further detailed analysis to determine which method is more suitable for the specific situation of an individual or a company.