USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
8.5 Tax Benefits As an incentive for the ownership and develop - ment of real estate in the United States, the US federal tax code provides owners of real estate with certain tax benefits. Real estate investors are permitted to depreci - ate the costs of buying and improving a build - ing (excluding the land, which is not considered “depreciable asset” ) in order to reduce taxable income over a certain period of time. However, taking such deductions reduces the owner’s cost basis in the property, which becomes rel - evant – and is likely to result in increased capital gains taxes – when the property is sold. Section 1031 of the federal tax code permits owners of real estate held for investment to defer paying capital gains tax if the proceeds from a sale are reinvested in “like-kind” property within a specified period of time. This tax benefit is par - ticularly useful when selling heavily depreciated property. The federal tax code also provides for a capi - tal gains tax exclusion in connection with the sale of one’s primary residence. The exclusion is USD250,000 of profit for an individual, or USD500,000 of profit for married couples, filing jointly.
a sworn Affidavit of Non-Foreign Status from a principal of the seller. Any US partnership that generates income in connection with a US trade or business ( “effec - tively connected income” , or ECI) must pay a withholding tax on any ECI that is allocated to a foreign partner. The tax withholding rate is 21% if the foreign partner is a corporation and 37% if the foreign partner is a non-corporate taxpayer. Also, a buyer of an interest in a partnership that is engaged in a US trade or business is required to withhold 10% of the purchase price paid to the foreign seller. Foreign individuals must pay federal income tax on long-term capital gains at a preferential maxi - mum rate of 20% if the real property was sold after a holding period of at least 12 months, or a maximum rate of 37% if such property was held for less than 12 months. Foreign corporate sellers are subject to income taxes equal to 21% of the gain from the sale of the real property, regardless of how long the property was held. Foreign corporations may also be subject to “branch profits tax” at the rate of 30% (or less, if provided in an applicable treaty) of the after- tax earnings from a US trade or business, to the extent that such earnings are not reinvested in US branch assets.
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