U.S.A. Expat Considering Complicated Property Purchase In U.S.

[Jingthing]

Not sure if anyone here can advise on this as it's a bit complex, unusual, but a real estate opportunity has presented itself for me in the US and it is very tempting, but not sure I can stomach all the complications.

I am being offered a half share in a well located major city suburban townhouse (from a close friend with cash flow issues purchasing another low priced home).

The unit was a foreclosure before, valued at Zillow for 70K, but I can buy it at 20K for a 50 percent share, and both names on title and joint tenants with right of survivorship. The current owner has had it for a year or so.

On top of that, I would have the right to buy out the coowner at any time for the CURRENT price of 50 percent, another 20K, even in the unlikely case of large appreciation.

The intention is provide a kind of housing insurance for me in the possible case where I would move back to the US at an older age, needing to go on medicare, etc. That is my primary motivation to buy, rather than income stream or potential appreciation.

This deal locks in the current historically very low price for the future should I need housing in the US. Otherwise, by the time I go back to the US (if I do) there is decent chance prices will rise a lot from now. Yes, of course there is a downside risk from the current levels, but I strongly feel there is not much lower it can go and not be free.

Anyway, the above is the good part.

Doing this would complicate my tax life as an expat.

The intention is that after I purchase my 50 percent share, then to rent it out (strong rental market) and share in the rental income (minus expenses, management fee to the coowner, etc.).

Now the expat part.

I use an address in the US state of the property as my US address for US banking, credit card, purposes, etc.

When I moved to Thailand, I filed a partial year STATE tax form in that state, kind of announcing I was leaving. Since then, NO state tax filings.

I still maintain a driver's license from that state, and have even obtained a new one since residing in Thailand.

On my federal return, I write my THAI address on the form.

I own a condo in Thailand which I consider my primary residence. Should I sell that condo someday (I am in good profit on paper with it) I hope to claim the Thai condo as my primary residence and thus qualify for the 250K profit tax exclusion on primary residence.

So it seems to me, this gets messy.

Say I have reportable income from rents on the coowned unit, which will be a rental.

Won't I really NEED to file state tax forms then, as my bank records will still be in that state (different from the rental condo) and there will be income from a property in that state, not reported in any other US state?

Ideally, I would like to avoid filing state tax returns indefinitely, so maybe this ruins that?

Also on sale of the coowned US unit, another taxable event. A related BIG concern, my Thai condo. Whether to continue to write my Thai address on my federal return, if I decide I need to file state returns. It seems quite weird to file in a US state with a Thai address, yes? So if I start filing state returns, wouldn't I need to use the US state address for both returns? In which case, if I sell my Thai condo, I think the IRS would have an issue calling my Thai residence my primary residence if/when I sell it.

OK, I admit this sounds complicated. I am obviously confused. The offer is tempting but the potential consequences may not be worth it.

Maybe there is one person who follows the issues I presented and can respond. Hope springs eternal.

[dave111223]

Why not buy the 50% now for 20K, then as soon as the paperwork has been finalized immediately buy the other guy out for an additional 20K; and come away owning a 70K property for 40K?

[lanny]

I think you are complicating a rather simple problem. True, you would need to file a state return but you would file a Non-resident form and only include the rental and expense. Both returns would still show the Thai address. You would need to report the rental income on Schedule E of your Federal return anyway.

Just because you own property doesn't mean you are a resident. Consider the New England resident who own a Florida summer condo; does he become a resident of two states?

[ericthai]

I think you are complicating a rather simple problem. True, you would need to file a state return but you would file a Non-resident form and only include the rental and expense. Both returns would still show the Thai address. You would need to report the rental income on Schedule E of your Federal return anyway.

Just because you own property doesn't mean you are a resident. Consider the New England resident who own a Florida summer condo; does he become a resident of two states?

Good thinking, actually Im from Fla, and there are people that try to be residents of both Fla and other states, Fla put a stop on issuing drivers licenses until you turn in your license from another state and have to show proof of residence. Anyway this is not related.

Jingthing, one thought I had was to open a company and let the company own the 50% share in the house, of course you then own the company and you would have to pay taxes on earned income, which may or not may help you. If you are already making over $91K per year then you will need to pay taxes on the earned income, if not then maybe best to own in your name so you dont have to pay the taxes. (still have to pay SS on earned income as being self employed) If you open a company to own the property then this will not effect your residence. Again as Lanny stated this might not be an issue. Let me know how things go, if you dont come up with any good info PM me and i will contact my accountant in the US for his ideas.

Good Luck,

Eric

[Jingthing]

Why not buy the 50% now for 20K, then as soon as the paperwork has been finalized immediately buy the other guy out for an additional 20K; and come away owning a 70K property for 40K?

Maybe I didn't explain this well enough. Zillow values mean nothing. What matters is what people will pay now in a STILL declining market. Currently 40K is approximately REAL market price in that area as the market is FLOODED with bank foreclosures and short sales. Even if I could get 70K, this between friends, and if he could get 70 now he would get 70 (not from me). My main motivation is locking in today's historically low crashed US housing prices in case I need or want to move back to the USA. I don't think the prices will rise much in 5 years, but in 10 years I think there could be a substantial rise.

Edited June 2, 2011 by Jingthing

[Jingthing]

I think you are complicating a rather simple problem. True, you would need to file a state return but you would file a Non-resident form and only include the rental and expense. Both returns would still show the Thai address. You would need to report the rental income on Schedule E of your Federal return anyway.

Just because you own property doesn't mean you are a resident. Consider the New England resident who own a Florida summer condo; does he become a resident of two states?

I agree I MAY be complicating this situation, but I still remain confused about tax/residency issues/primary residence issues for tax exclusion on sale (I want to keep that in Thailand).

In any case, one BIG part of this potential transaction has gotten a lot simpler.

The idea of co-owning the property 50/50 has been scrapped. Now the potential deal involves me buying the entire property with 10K down, and 30 K financed with a 15 year low interest private mortgage from the seller. For that part, definitely cleaner.

I hope to reframe some of my revised concerns later; thanks for the feedback so far.

[lanny]

I think you are complicating a rather simple problem. True, you would need to file a state return but you would file a Non-resident form and only include the rental and expense. Both returns would still show the Thai address. You would need to report the rental income on Schedule E of your Federal return anyway.

Just because you own property doesn't mean you are a resident. Consider the New England resident who own a Florida summer condo; does he become a resident of two states?

I agree I MAY be complicating this situation, but I still remain confused about tax/residency issues/primary residence issues for tax exclusion on sale (I want to keep that in Thailand).

In any case, one BIG part of this potential transaction has gotten a lot simpler.

The idea of co-owning the property 50/50 has been scrapped. Now the potential deal involves me buying the entire property with 10K down, and 30 K financed with a 15 year low interest private mortgage from the seller. For that part, definitely cleaner.

I hope to reframe some of my revised concerns later; thanks for the feedback so far.

You still are confused.

Buying a property for investment purposes (renting it out) does NOT establish residency. Owning this house, whether, half or whole, would in no way affect the foreign residency status for income earned here. In any case, rental income does not qualify for the foreign exclusion; if you make a profit, you pay the tax. Usually, though, with interest and depreciation, rentals do no produce a tax profit for many years.

Just because you receive SOME income from a particular state does not mean that you must pay tax on ALL your income to that state. If that were true, many people would owe all their income to the various states! Also, state and Federal taxes are not unified, that is, they may differ from state to state but each state sets its own rules, independent of what the Feds do.

[wpcoe]

I think you are complicating a rather simple problem. True, you would need to file a state return but you would file a Non-resident form and only include the rental and expense. Both returns would still show the Thai address. You would need to report the rental income on Schedule E of your Federal return anyway.

Just because you own property doesn't mean you are a resident. Consider the New England resident who own a Florida summer condo; does he become a resident of two states?

:thumbsup:

Yes, if you go into the rental business you need to file a state return for the income earned/loss declared. You will also be depreciating the asset value. I believe you can also deduct the interest payments, but not sure.

There is nothing strange or unusual to use an overseas address on a state (or federal) tax form, especially a non-resident form. Your primary residence will continue to be your Thailand condo. In fact it is your ONLY residence if you rent out your USA townhouse, unless you rent it to family members, and decide to categorize the townhouse as a secondary residence. That's worthy of its own thread.

[CaptHaddock]

It depends on the state's tax domiciliary rules and its history of enforcement. Have you lived in that state before? Your stated purpose would appear to indicate an intention to return, which is the hook on which the more aggressive states hang a tax liability. Especially true of California. Even having friends and using professional services in CA, if you have previously lived there, can be construed by the state as indicating an intention to return and thereby establishing a tax domicile. You need to look up the domicile regs in your state and consult a lawyer who deals with such cases. By no means are you making it more complicated than necessary. Remember the states are desperate for money.

Why don't you post your question identifying the state in question at www.fairmark.com? You will get some well-informed opinions.

Edited June 4, 2011 by CaptHaddock

[wpcoe]

Several years ago when I lived in Nevada, there were legislative moves by California to be able to tax retirees who moved across the state border to avoid paying CA state income tax. (NV has no state income taxes.) CA implemented strict requirements as to who was required to continue paying CA state income tax even after no longer physically residing there. And, that was before the huge state budget deficits of this past decade.

So, yes, it's not a stretch to believe that there are likely other states who now have laws on the books that might put a non-resident property owner on the hooks for state income tax, similar to how the IRS taxes US citizens on their worldwide income.

It would not surprise me that even if the OP could convince them that today he is simply a non-resident investor, that if later he subsequently moves into the property, that they could assess him past-date income taxes, penalties and interest backdated to the date of purchase. As stated above, the states are desperate for tax income.

[Barack]

As tempting as this deal sounds, if I was in the OP's shoes and of course not knowing all his personal details, I would be inclined not to go forward on this transaction. Why complicate your life by being an absentee landlord. Your taxes (and life) which should be simple now will become much more complicated. If you become seriously ill and disabled and must repatriate, this condo becomes a liability. You will not be able to qualify for state paid Medi-caid if you own a home. Your Thailand assets can continue to remain "hidden".

[lanny]

Several years ago when I lived in Nevada, there were legislative moves by California to be able to tax retirees who moved across the state border to avoid paying CA state income tax. (NV has no state income taxes.) CA implemented strict requirements as to who was required to continue paying CA state income tax even after no longer physically residing there. And, that was before the huge state budget deficits of this past decade.

So, yes, it's not a stretch to believe that there are likely other states who now have laws on the books that might put a non-resident property owner on the hooks for state income tax, similar to how the IRS taxes US citizens on their worldwide income.

It would not surprise me that even if the OP could convince them that today he is simply a non-resident investor, that if later he subsequently moves into the property, that they could assess him past-date income taxes, penalties and interest backdated to the date of purchase. As stated above, the states are desperate for tax income.

That law was overridden by Congress some 15 years ago. It is now Federal law that such income paid to a non-resident cannot be taxed by a state simply because it was earned in that state. I have experience with this because several clients were effected and my own father faced this.

Furthermore, there are statute of limitations rules that would prevent the unlimited assessment of back taxes, etc. There are also rules that counter double taxation of the same income.

I don't see the problem here. There are a great many "absentee landlords" who own and rent out property in one state while living in another.

[wpcoe]

That law was overridden by Congress some 15 years ago. It is now Federal law that such income paid to a non-resident cannot be taxed by a state simply because it was earned in that state. I have experience with this because several clients were effected and my own father faced this.

Maybe I'm misunderstanding what you mean, but I just did a quick Google search and the top responses included:

-----------------------------------

What is a nonresident state tax return? Do I need to file one?

Simply put, a nonresident state tax return is a tax return for a state other than your resident state. You'll need to file one if:

-- You earned wages or income in a state you're not a resident of;

-- You received rental income, gambling winnings, or sold a home for a profit in a state you're not a resident of;

(source: http://turbotax.intuit.com/support/iq/TurboTax-Topics/How-do-I-File-a-Nonresident-State-Tax-Return-/GEN12109.html)

-----------------------------------

Example 3: You live in South Carolina but you work in North Carolina for one week. You file the resident form for South Carolina and file the nonresident form for North Carolina.

Example 4: You live in California and you have a rental property in Oregon. You file the resident form for California and file the nonresident form for Oregon.

Example 5: You live in New York and your great aunt died and left her Connecticut farm—which continues to operate until it can be sold—to you. You file the resident form for New York and a nonresident form for Connecticut.

(source: http://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Multiple-States---Where-To-File/INF12054.html)

-----------------------------------

Residents of California must pay income tax on all sources of income and non-residents pay tax on any income from a California source.

(source: http://www.ehow.com/about_6134405_california-state-income-tax-information.html)

-----------------------------------

Granted, some of those links are a few years old, but definitely within the past 15 years, and each one indicates a need to pay a tax to a state simply because the income was earned in that state, when the taxpayer is not a resident of that state. Please note that rental income, the topic relating to this thread, is included in those non-resident tax obligations.

[lanny]

That law was overridden by Congress some 15 years ago. It is now Federal law that such income paid to a non-resident cannot be taxed by a state simply because it was earned in that state. I have experience with this because several clients were effected and my own father faced this.

Maybe I'm misunderstanding what you mean, but I just did a quick Google search and the top responses included:

-----------------------------------

What is a nonresident state tax return? Do I need to file one?

Simply put, a nonresident state tax return is a tax return for a state other than your resident state. You'll need to file one if:

-- You earned wages or income in a state you're not a resident of;

-- You received rental income, gambling winnings, or sold a home for a profit in a state you're not a resident of;

(source: http://turbotax.intuit.com/support/iq/TurboTax-Topics/How-do-I-File-a-Nonresident-State-Tax-Return-/GEN12109.html)

-----------------------------------

Example 3: You live in South Carolina but you work in North Carolina for one week. You file the resident form for South Carolina and file the nonresident form for North Carolina.

Example 4: You live in California and you have a rental property in Oregon. You file the resident form for California and file the nonresident form for Oregon.

Example 5: You live in New York and your great aunt died and left her Connecticut farm—which continues to operate until it can be sold—to you. You file the resident form for New York and a nonresident form for Connecticut.

(source: http://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Multiple-States---Where-To-File/INF12054.html)

-----------------------------------

Residents of California must pay income tax on all sources of income and non-residents pay tax on any income from a California source.

(source: http://www.ehow.com/about_6134405_california-state-income-tax-information.html)

-----------------------------------

Granted, some of those links are a few years old, but definitely within the past 15 years, and each one indicates a need to pay a tax to a state simply because the income was earned in that state, when the taxpayer is not a resident of that state. Please note that rental income, the topic relating to this thread, is included in those non-resident tax obligations.

Current income earned in a non-resident state is and always has been taxable in that state. What changed was taxation of pensions and similar sources of income. California developed the theory that any portion of a pension earned in California was taxable there, even if the recipient was no longer a California resident.

[wpcoe]

Ah, *now* I get it!

When I lived in NV was roughly 15 years ago, and IIRC at that time, CA had "compromised" from flat out requiring CA state tax be paid on pensions paid to out-of-state residents, to only the first year or two that they lived out-of-state. Sounds like right after that the feds stepped in and made CA behave.

Sorry for that needless side track this thread took!