The 2018 Tax Cuts and Jobs Act increased the estate tax exemption available for U.S. citizens to $11,200,000 for an individual, or $22,400,000 for a married couple and left the gift and estate tax rules unchanged as they apply to foreigners.

That means many foreigners (Non-Resident Aliens) holding U.S. situated assets valued more than $60,000 may be subject to the full impact of the US federal estate tax at death.

This is in addition to another tax issue. A foreigner does not have to have a Tax ID Number in order to purchase a real estate property in the United States. However, a tax liability will arise when they are ready to sell their property. According to Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), the buyer of U.S. real estate from a foreign person or entity must withhold tax equal to 10% or 15% of the “amount realized” from the sale. Furthermore, some States require tax withholding as well. California requires that 3 1/3% of the sales price be withheld by buyers.

The withholding tax is not an actual tax due. It’s like a security deposit which IRS requires the buyer to send to IRS to ensure the foreign seller will pay the tax.

To get tax withholding back, at the end of the fiscal year, the foreign seller must file his or her income tax return to report the gain on the sale of real estate. If the real income tax calculated is less than withholding amount, the foreign seller will receive a refund from IRS.

Sounds confusing! You are not alone. Of course with proper planning, foreigners can avoid some of these unexpected tax consequences.

p.s. Under current law, for 2018 and 2019, the annual gift exemption is $15,000 to non-spouse. However, annual exclusion of gift tax to a non-U.S. citizen spouse is $152,000 per year as compared to the unlimited annual gift between citizen spouses.