NRI Purchasing Property In USA: Process & Tax Implication

Buying their very own property in abroad is still a dream of many NRIs. This entire feeling is overwhelming, especially when you are planning to buy a property in the world's top economy: America.

For NRIs purchasing property in USA, you must know that the process involves different legal, practical, and financial steps, which many of you might not be aware of. Well, this guide talks exactly about that.

We will discuss the process of buying a property in the USA, including the tax implications in India and the USA, as well as the documents required.

Step-by-Step Process For An NRI Purchasing Property In The USA

For NRIs who are planning to purchase a property in the USA, the following is the only step-by-step process you'll need to buy a property in the USA.

Step 1: Set Your Budget And Look For Potential Financing Options

Property in the USA is expensive compared to India. Hence, the first step regarding the home-buying process for NRIs in the USA is to figure out the budget as to how much you can afford and how you will be financing the set budget.

If you plan to pay in cash, ensure funds are available or can be easily transferred in the US beforehand. If you are planning to get a property loan, you can also explore foreign national mortgage programs and financing options available to NRIs. However, you have to be prepared for high down payments and high interest rates.

Step 2: Pick The Right Real Estate Agent And Start Hunting

As an NRI living in the USA, the next step for you is to start your property hunt well before you plan to move in. To find the right property in the right location, you can browse several property websites, but the best approach is to hire a real estate consultant or agent who also understands the cross-border tax implications.

Among NRIs (nonresident investors) in the USA, Florida has been the top choice for real estate investment for the past decade.

Now, once you have decided on the location, choose the right neighborhood. Meaning if you are planning to buy a residential property, consider looking in proximity to your kids' school, your workplace, hospital, and other lifestyle amenities.

Also, please ensure this step is your make-or-break point: do extensive research, hire a good real estate consultant, and take the time to review everything thoroughly before making the final decision.

Step 3: Agree On An Offer

Once you have found the property and the location, the next step is to submit an offer to the seller. The seller might accept, reject, or provide a counteroffer in return.

Please note that in the USA, you may need to make an earnest money deposit at this stage. This deposit is a small percentage of the sale fee. If you buy the property, the deposit will be adjusted to your closing costs, but you may lose the money if you accept the offer first and then back out later.

Step 4: Secure Your NRI Real Estate Investment in the USA

NRIs, this step is required when purchasing a property in the USA. The title report ensures that your investment is secure and protects you from future legal issues.

Step 5: Property Inspection Before Buying Property In the USA For NRI

Once everything is in order, the final step before closing the buying process is to inspect the property. It is strongly recommended to schedule a home inspection to ensure that everything in the property is as described and that there are no hidden issues, such as electrical or structural damage, or other problems.

Upon inspection, if you uncover any issues, you can ask the concerned seller to get it right or re-negotiate the price. Sign the purchase deed only after verifying that everything is in order.

Step 6: Close The Deal And Pay The Dues

And once everything is finalized, close the deal. If you are financing the property with a mortgage, the lender is required to tell you about the costs and payment schedules days before closing.

Clear the relevant fees, any taxes, and other payments due at the deal's closure. Once all the payments are clear, congratulations, you are now a property owner in the USA.

Please note that this process is viable for any foreign nationals purchasing property in the USA.

Tax Implications For NRIs Purchasing Property In The USA

As an NRI, owning a property in the USA comes with its own set of obligations. It is essential to understand these tax implications to avoid last-minute surprises and ensure compliance with US tax laws.

The Property Taxes

Just like any other US citizens, NRIs who own property are required to pay local property taxes on any real estate they own in the United States. The regional state government usually imposes these taxes, and they are generally based on the property's value. The tax rate varies widely by location, and this NRI tax filing in the USA is mandatory.

Rental Income Taxation For NRIs In the USA

Rental income earned in the USA is taxable, even for non-resident individuals living there.

Mortgage Interest Deductions:

Under IRS rules, interest paid on a US home loan may be tax-deductible.

Documents Required By NRIs Purchasing Property In the USA

As an NRI, there are no federal restrictions on purchasing a property; however, you must adhere to specific documentation to validate your purchase.

The documents you need can vary depending on the specifics of your situation. Here are some common documents required for NRIs to buy property in the USA.

Proof of Identity: Your passport and other government-issued IDs can act as your proof of identity.

Proof of Address & Residence Status: You need documents that prove your address and residence, such as a driver's license or other official documents. Additionally, you will need to verify your legal residency status if you are planning to live in the property.

Proof of Income: If you are planning to purchase a property on a mortgage for an NRI in the USA, you may have to demonstrate your ability to make loan payments. This involves providing pay stubs, tax returns, and other income-related documents.

Proof of Affordability: The loan lenders will ask you for evidence of any debts or loan payments to analyze your overall financial capacity and the affordability of the mortgage.

As this is a standard list of documents, you may need to provide additional documents as a Non-Resident Indian (NRI), depending on the municipality or state; hence, consult a real estate professional for a complete checklist.

Key Considerations NRIs Must Make While Buying A Property In the US.

The following are some points NRIs miss while making an NRI real estate investment in the USA.

• Schedule FA reporting is mandatory for NRIs, even if the property remains unused.
• If you have taken a mortgage for an NRI in the USA to buy property, foreign mortgage interest must be reported if you are claiming a deduction.
• In the USA, insurance and maintenance costs are higher.
• If you plan to rent the property you bought, please note that property management fees will apply.
• In the USA, the HOA (Society) fees are often high.
• In the USA, state-level taxes vary, so what an NRI pays in taxes in Florida isn't necessarily what an NRI in California would pay.
• For NRIs, currency fluctuations are themselves an unpredictable game, and hence these fluctuations also have the potential to affect your overall property returns.
• The gift of USA property to any Indian close relative has tax implications under FEMA and the RBI.

An Example Explaining NRI Purchasing Property In the US Concept

The following example will help you understand the entire concept of an NRI buying a property in the US.

• Name: Rahul
• His residential status: NRI living in the USA
• Property: Rental Property In The USA
• The Property Purchase Price: $400,000

The USA Federal Rental Income Tax Calculation

The Gross Rental Income $24,000

Less: The maintenance expenses, such as the interest, property tax, and other related allowable expenses, which are $10,000.

Net Taxable rental income is $14,000

Here is an illustration of non-resident aliens (NRAs) or NRIs filing Form 1040-NR.

The rental income is taxed at graduated slab rates.

Assuming Rahul falls in the 12%-22% bracket.

Example of the tax calculation

Federal tax, on average 18%, on $14,000.

US Tax For NRI = $2,500

However, please note that the state taxes, such as those in California and New York, might apply separately depending on the state you are in.

The Bottom Line

NRI purchasing property in the USA involves a long, somewhat complicated process, from setting a budget to evaluating financing options, choosing the correct location, and partnering with a real estate agent to ensure everything goes smoothly. The process doesn't end here; next comes the tedious negotiating step, where you will make an offer or give back counteroffers, then arrange the property inspection, before closing the deal.

All of this is already sounding complicated, and imagine stepping into the market and actually doing this as an NRI. Additionally, for NRIs, rules, regulations, and DTAA between India and the USA, and documents vary on a case-by-case basis. Hence, hiring a trusted NRI real estate and taxation professional is a must-have.

And when it comes to NRI taxation, Savetaxs is the name to trust. We have been helping NRIs in the USA purchase properties in accordance with the US laws. Our experts bring 30+ years of experience to the table when it comes to a US real estate and taxation company.

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