The US real estate market appeals to foreign investors for various reasons. One factor is that there are tax benefits to investing in the US. Germans are one group that invests heavily in US real estate. Thanks to an income-tax treaty between Germany and the United States, German residents can avoid double taxation. Another benefit is that you can enjoy tax-deductible mortgage interest.
Ways To Take Advantage of Tax-Deductible Mortgage Interest in the US
Set up an LLC
The German investor needs to set up a Limited Liability Company (LLC) in the US. You can do this online and have it completed in a few days. Once you have the LLC, you can open a US-based bank account to facilitate the mortgage process.
Apply For a Mortgage
The investor can apply for a mortgage through the newly set up LLC. You can use this mortgage to purchase a rental property in the US, which can generate rental income for the investor. The mortgage interest paid by the LLC is tax-deductible since it is a business expense.
Manage the LLC Remotely
You can manage the LLC remotely as an investor from Germany. You can direct revenue from the rental property to the US bank account. The investor can use the funds to cover operating expenses. You could also transfer funds to your bank in Germany.
Only Deduct Interest
It is important for investors to remember they can only deduct the interest payments and not the principal. Only the interest counts as a business expense. The principal counts as the cost of an asset. However, you can depreciate the asset over time as a deduction.
It is essential to note that investors must file a US tax return and attach form W-8ECI to claim the interest deduction. This form certifies that the investor is a non-resident engaged in a US trade or business.
Additionally, investors must keep accurate records of all rental income and expenses related to the property. Important documents include receipts for repairs, maintenance, and property management fees. By keeping detailed records, investors can ensure that they only deduct legitimate expenses and avoid potential tax issues.
Another way you can try is FIRPTA if you are a non-resident US with no green card or substantial presence. To learn more about FIRPTA, click here.
German long-distance investors can reduce their tax liability in the US in several ways. Deducting mortgage interest is just one. You can work with a local tax expert to learn more about the tax benefits of investing in the US.
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