This essay seeks to identify those considered to be a “US Taxpayer” with respect to reporting foreign real estate or income from it to the IRS. In other words, today, I will discuss the foreign real estate US Taxpayer definition.
Foreign Real Estate US Taxpayer Definition: IRC §7701(a)
The definition of “US taxpayer” for the purposes of foreign real estate is equivalent to the definition of US tax resident or “US Person” in IRC §7701(a). “US Persons” are equivalent to “US taxpayers” for the purposes of this article.
Note that, under §7701(a)(1), a person “shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation”. In other words, a “person” may mean not only an individual, but also a business entity, trust or estate.
Foreign Real Estate US Taxpayer Definition: General Definition
Under §7701(a)(30), a “US Person” means a US citizen, US resident alien, domestic partnership, domestic corporation, any estate that is not a foreign estate and a trust that satisfies both conditions of §7701(a)(30)(E). Let’s discuss each of these categories of US Persons in more detail.
Foreign Real Estate US Taxpayer Definition: Individuals Who Are US Persons
As I stated above, all US citizens and US resident aliens are considered US Persons. In the vast majority of cases, it is fairly easy to determine who a US citizen is; most complications occur with respect to “accidental Americans” and Americans with only one parent who is a US citizen.
A US resident alien is a more complex term. It includes US Permanent Residents (i.e. “green card” holders) as well as all persons who satisfied the Substantial Presence Test (unless an exception applies) and all persons who declared themselves as US tax residents. This means that a person may be a US resident for tax purposes, but not for immigration purposes. This situation creates a lot of confusion among people who marry US persons or who come to the United States to work; many of them believe themselves to be Non-US Persons, but in reality they are US tax residents.
Foreign Real Estate US Taxpayer Definition: Domestic Corporations & Partnerships
Under §7701(a)(4), corporations and partnerships are considered US Persons if they are created or organized in the United States or under the laws of the United States or any of its states. In the case of partnerships, the IRS may issue regulations that provide otherwise, but the IRS has not done so yet. Conversely, a corporation or a partnership is a Non-US Person if it is not organized in the United States.
Pursuant to §7701(a)(9), the definition of the United States for the purposes of §7701(a)(4) includes only the 50 States and the District of Columbia. In other words, §7701(a)(9) excludes all US territories and possessions from the definition of the United States. For example, a corporation formed in Guam is a Non-US Person!
The biggest complication that one would encounter in this area of law is with respect to common-law partnerships. The determination of their US tax residency may be a lot more complex, because they are not officially organized under the laws of any state.
Foreign Real Estate US Taxpayer Definition: Domestic Trust
A trust is a US Person if it satisfies both tests contained in §7701(a)(30)(E). The first test is a “court test”: a court within the United States must be able to exercise primary supervision administration. The second test is a “control test”: one or more US persons must have the authority to control all substantial decisions of the trust. Failure to meet either test will result in the trust being a Non-US Person with huge implications for US tax purposes.
Foreign Real Estate US Taxpayer Definition: Domestic Estate
While all other definitions described above define a domestic entity and state that a foreign entity is not a domestic one, it is exactly the opposite with estates. Under §7701(a)(30)(D), an estate is a US Person if it is not a foreign estate described in §7701(a)(31).
§7701(a)(31)(A) defines foreign estate as estate “the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A”.
Contact Sherayzen Law Office for Professional Help with Your Foreign Real Estate Reporting Obligations in the United States
If you are a US person who owns foreign real estate and you have questions concerning your US tax compliance concerning owning foreign real estate, selling real estate or reporting income generated by foreign real estate, contact Sherayzen Law Office for professional help. We have helped US taxpayers around the world with their foreign real estate US tax obligations, and we can help you!
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