Tax on property income in United States

Taxation Researcher | January 05, 2020

INDIVIDUAL TAXATION

Nonresident individuals in the U.S. are liable to pay income tax on their U.S.-sourced income. There are four filing categories for taxpayers, namely; (1) single, (2) head of household, (3) married filing jointly, and (4) married filing separately. However, unmarried nonresidents are not allowed to file as heads of household. Married nonresidents are also not allowed to file jointly with a nonresident spouse.

INCOME TAX

Income is taxed at the federal level (at progressive rates) and at the state level (at progressive rates). There are four categories of income: (1) wages and salaries, (2) business income, (3) investment income, and (4) capital gains. All kinds of income, except capital gains, are generally aggregated and taxed at the same rates. However, for nonresidents, the tax liability depends on the type of income that is being taxed.

Federal Income Tax

Employment income, as well as business and professional income, is subject to progressive federal income tax rates. Investment income is subject to a 30% withholding tax, if such income is considered to be Fixed Determinable Annual Periodical (FDAP) income.

In the computation of the tax liability for employment and business income, only trade or business expenses related to employment, contributions to U.S. charities and U.S. casualty losses are deductible. Nonresidents are not allowed to claim the standard deduction and may only claim one personal exemption, regardless of marital status and number of dependants. For investment income, the withholding tax is levied on the gross amount, without offset for deductions, personal allowances or credits.

FEDERAL INCOME TAX 2017 FOR MARRIED INDIVIDUALS FILING JOINTLY

TAXABLE INCOME, US$ TAX RATE
Up to US$19,750 10%
US$19,750 – US$80,250 12% on band over US$19,750
US$80,250 – US$171,050 22% on band over US$80,250
US$171,050 – US$326,600 24% on band over US$171,050
US$326,600– US$414,700 32% on band over US$326,600
US$414,700– US$622,050 35% on band over US$414,700
Over US$622,050 37% on all income over US$622,050
Source: Global Property Guide

FEDERAL INCOME TAX 2020 FOR HEADS OF HOUSEHOLDS

TAXABLE INCOME, US$ TAX RATE
Up to US$14,100 10%
US$14,100– US$53,700 12% on band over US$14,100
US$53,700– US$85,500 22% on band over US$53,700
US$85,500– US$163,300 24% on band over US$85,500
US$163,300– US$207,350 32% on band over US$163,300
US$207,350– US$518,400    35% on band over US$207,350
Over US$518,400 37% on all income over US$518,400
Source: Global Property Guide

FEDERAL INCOME TAX 2020 FOR SINGLE INDIVIDUALS

TAXABLE INCOME, US$ TAX RATE
Up to US$9,875 10%
US$9,875 – US$40,125 12% on band over US$9,875
US$40,125 – US$85,525 22% on band over US$40,125
US$85,525 – US$163,300 24% on band over US$85,525
US$163,300 – US$207,350 32% on band over US$163,300
US$207,350 – US$518,400   35% on band over US$207,350
Over US$518,400 37% on all income over US$518,400
Source: Global Property Guide

FEDERAL INCOME TAX 2020 FOR MARRIED INDIVIDUALS FILING SEPARATELY

TAXABLE INCOME, US$ TAX RATE
Up to US$9,875 10%
US$9,875 – US$40,125 12% on band over US$9,875
US$40,125 – US$85,525 22% on band over US$40,125
US$85,525 – US$163,300 24% on band over US$85,525
US$163,300 – US$207,350 32% on band over US$163,300
US$207,350 – US$518,400   35% on band over US$207,350
Over US$518,400 37% on all income over US$518,400
Source: Global Property Guide

FEDERAL INCOME TAX 2019 FOR MARRIED INDIVIDUALS FILING JOINTLY

TAXABLE INCOME, US$ TAX RATE
Up to US$19,400 10%
US$19,400 – US$78,950 12% on band over US$19,400
US$78,950 – US$168,400 22% on band over US$78,950
US$168,400 – US$321,450   24% on band over US$168,400
US$321,450 – US$408,200 32% on band over US$321,450
US$408,200 – US$612,350 35% on band over US$408,200
Over US$612,350 37% on all income over US$612,350
Source: Global Property Guide

FEDERAL INCOME TAX 2019 FOR HEADS OF HOUSEHOLDS

TAXABLE INCOME, US$ TAX RATE
Up to US$13,850 10%
US$13,850 – US$52,850 12% on band over US$13,850
US$52,850 – US$84,200 22% on band over US$52,850
US$84,200 – US$160,700 24% on band over US$84,200
US$160,700 – US$204,100   32% on band over US$160,700
US$413,350 – US$510,300   35% on band over US$204,100
Over US$510,300 37% on all income over US$510,300
Source: Global Property Guide

FEDERAL INCOME TAX 2019 FOR SINGLE INDIVIDUALS

TAXABLE INCOME, US$ TAX RATE
Up to US$9,700 10%
US$9,700 – US$39,475 12% on band over US$9,700
US$39,475 – US$84,200 22% on band over US$39,475
US$84,200 – US$160,725 24% on band over US$84,200
US$160,725 – US$204,100 32% on band over US$160,725
US$204,100 – US$510,300 35% on band over US$204,100
Over US$510,300 37% on all income over US$510,300
Source: Global Property Guide

FEDERAL INCOME TAX 2016 FOR MARRIED INDIVIDUALS FILING SEPARATELY

TAXABLE INCOME, US$ TAX RATE
Up to US$9,700 10%
US$9,700 – US$39,475 12% on band over US$9,700
US$39,475 – US$84,200 22% on band over US$39,475
US$84,200 – US$160,725 24% on band over US$84,200
US$160,725 – US$204,100 32% on band over US$160,725
US$204,100 – US$510,300 35% on band over US$204,100
Over US$510,300 37% on all income over US$510,300
Source: Global Property Guide


State Income Tax

State governments in the U.S. levy their own taxes on income. Non-residents are subject to state income taxes in the state where they earn income. The rates are progressive and vary from state to state. The income brackets are mostly the same as, or sometimes modified from, the federal income tax brackets.

Seven states, however, do not impose taxes on income. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington State and Wyoming. New Hampshire only applies tax on interest and dividend income, and Tennessee only imposes taxes on income from stocks and bonds.

An Example: New York State

The state of New York imposes taxes on the New York-sourced income of nonresidents. The rates are progressive, and are applicable to both residents and nonresidents. Nonresidents are also allowed to avail of personal allowances or credits, unless the credit or allowance is specifically for residents.

NEW YORK STATE INCOME TAX 2019 FOR MARRIED INDIVIDUALS FILING JOINTLY

TAXABLE INCOME, US$ TAX RATE
Up to US$17,150 4%
US$17,150 - US$23,600 4.50% on band over US$17,150
US$23,600 - US$27,900 5.25% on band over US$23,600
US$27,900 - US$43,000 5.90% on band over US$27,900
US$43,000 - US$161,550 6.45% on band over US$43,000
US$161,550 - US$323,200 6.65% on band over US$161,550
US$323,200 - US$2,155,350 6.85% on band over US$323,200
Over US$2,155,350 8.82% on all income over US$2,155,350
Source: Global Property Guide

NEW YORK STATE INCOME TAX 2019 FOR SINGLE INDIVIDUALS & MARRIED INDIVIDUALS FILING SEPARATELY

TAXABLE INCOME, US$ TAX RATE
Up to US$8,500 4%
US$8,500 - US$11,700 4.50% on band over US$8,500
US$11,700 - US$13,900 5.25% on band over US$11,700
US$13,900 - US$21,400 5.90% on band over US$13,900
US$21,400 - US$80,650 6.45% on band over US$21,400
US$80,650 - US$215,400 6.65% on band over US$80,650
US$215,400 - US$1,077,550 6.85% on band over US$215,400
Over US$1,077,550 8.82% on all income over US$1,077,550
Source: Global Property Guide

NEW YORK STATE INCOME TAX 2019 FOR HEAD OF HOUSEHOLD

TAXABLE INCOME, US$ TAX RATE
Up to US$12,800 4%
US$12,800 - US$17,650 4.5% on band over US$12,800
US$17,650 - US$20,900 5.25% on band over US$17,650
US$20,900 - US$32,200 5.90% on band over US$20,900
US$32,200 - US$107,650 6.45% on band over US$32,200
US$107,650 - US$269,300 6.65% on band over US$107,650
US$269,300 - US$1,616,450 6.85% on band over US$269,300
Over US$1,616,450 8.82% on all income over US$1,616,450
Source: Global Property Guide

RENTAL INCOME
Non-residents with rental income are taxed at the federal and, generally, at the state levels. At the federal level, rental income is considered as investment income, and non-residents may opt to have their rental income classified as Fixed Determinable Annual Periodical (FDAP) income or as Effectively Connected Income (ECI).

Generally, when a non-resident is engaged in a trade or business in the U.S., income from such activities is considered to be ECI. When a non-resident earns income from sources that are fixed or regular, or when income is determinable before it is earned, such income is treated as FDAP income.
Under the FDAP classification, rental income is subject to a 30% withholding tax, levied on the gross amount, without offset for deductions, personal allowances or credits. If the taxpayer chooses to have rental income classified as ECI, the ordinary progressive tax rates are imposed after allowable deductions have been applied. Non-residents are only given this choice when it pertains to income from real estate property.


CAPITAL GAINS TAX


Federal Capital Gains Tax

Capital Gains Tax will be reduced to 0% for capital assets disposed of after 31 December 2007. However, the rates will revert to the previous rates of 20% and 10% on 01 January 2011, when the reduced rates for capital gains expire unless Congress extends the law (which it most probably will).

When a nonresident alien sells a property, the buyer is required to withhold 10% of the selling amount as tax. The withholding tax is later credited as advance payment for capital gains tax.

To calculate the capital gains or losses, take the sales price then deduct selling expenses, from the amount realized. Then deduct the original cost of property, plus expenses deemed to have increased its value, less claims which have notionally decreased its value (this is known as the "adjusted basis"). Expenses deemed to have increased its value are capital improvements (roof replacement, paving the driveway, central air conditioning installation, rewiring, etc.), assessments for local improvements (water connections, sidewalks, roads), casualty losses (restoration of damaged property), legal fees, and zoning costs. Expenses deemed to have decreased its value are depreciation, casualty or theft loss deductions and insurance reimbursement, certain credits, exclusions and deductions, and postponed gain from the sale of a home.

State Capital Gains Tax

Most states tax capital gains as part of income. State income tax rates apply.


PROPERTY TAXATION


Real Estate Tax

Real estate property is not taxed at the federal level. Real estate taxes are levied by the local municipalities and counties of the U.S. states. The rates vary from jurisdiction to jurisdiction, as well as the methods of assessing the value of the property.

An Example: New York City

The city of New York levies taxes on real estate property within its jurisdiction. The tax is levied on the assessed value of the property. The assessment begins with the classification of property into one of the four classes.

  • Class I includes most residential property of up to three units (such as one-, two-, and three-family homes and small stores or offices with one or two apartments attached), vacant land zoned for residential use, most condominium buildings not more than three stories.
  • Class II consists of all other property that is primarily residential, such as cooperatives and condominiums.
  • Class III includes property with equipment owned by a gas, telephone or electric company.
  • Class IV includes all commercial and industrial property, such as office or factory buildings.

Once the property´s class is determined, the appropriate multiplier, called the assessment ratio, for its class is applied to its market value. For Class I properties, the assessment ratio is 6%. For Classes II, III and IV, the assessment ratio is 45%. The end result of this calculation will be the assessment value, on which the tax will be imposed.
The rates of the property tax vary for each class.

NEW YORK CITY PROPERTY TAX 2017-2018

CATEGORY
TAX RATE
Class I
20.385%
Class II
12.729%
Class III
11.891%
Class IV
10.514%

NEW YORK CITY PROPERTY TAX 2016-2017

CATEGORY
TAX RATE
Class I
19.991%
Class II
12.892%
Class III
10.934%
Class IV
10.574%

NEW YORK CITY PROPERTY TAX 2015-2016

CATEGORY
TAX RATE
Class I
19.554%
Class II
12.883%
Class III
10.813%
Class IV
10.656%

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