Taxation in the United States
In the United States, taxes on income from rental investment are payable to the city and the federal state. Once this process is completed, this income must also be declared in France. The tax treaty established between the two countries allows French investors to avoid double taxation thanks to a tax credit mechanism obtained in France.
In the USA:
4 steps are needed to determine the overall amount of taxes to be paid in the United States:
a) Calculation of net property income.
All the real costs incurred in the context of the management of the property are deductible from the gross rents: management costs, insurance, current work, or travel costs (plane ticket), subsistence costs, etc.
Take the example of a French investor who bought a house for $ 100.000. If the gross annual rent was $ 14.000 and the charges amounted to $ 4.000, the net property income to report will be only $ 10.000.
b) Depreciation of part of the purchase price
Whatever the status of the investor, part of the purchase price can be amortized on a straight-line basis over 27,5 years.
Take the example of a rental investment of $ 100.000 that generates $ 10.000 in net income. The value used as the basis for calculating the depreciation is equal to the value of the frame, i.e. approximately 80% of the purchase value: 100.000 x 80% = $ 80.000 (value of the frame) 80.000 / 27,5 = $ 2.909 (the annual depreciation) 10.000 – 2.909 = $ 7.091 (taxable income after depreciation)
c) “Personal exemption”
Each owner is granted a tax deduction in nominal value, for the year 2018, the sum corresponds to $ 4.150. This deduction is applied on the net income to be declared: 7.091 – 4.150 = $ 2.941 (taxable income)
d) Application of the tax bracket
As in France, the American income tax brackets are progressive. In the majority of cases, investors are taxed in the 1st tranche at 10%. This corresponds to taxable income of less than $ 8.925 for a single person and $ 12.750 for a couple. Beyond that, the marginal brackets are 15%, 25%, 28%, 33%, 35% and 39,6%.
The portion of 10% will be effective: $ 2.941 x 10% = $ 294
In our example of a property purchased $ 100.000, with a gross income of $ 14.000, the property tax will only be $ 294
When American income is declared in France, a tax credit equal to French tax is granted by the tax treaty (article 24) in order to avoid double taxation. To calculate this tax credit, it is therefore necessary to start from the gross foreign property income ($ 14.000) and redo the calculations by applying the French tax rules on property income (as if this income were from French source). This restatement makes it possible to calculate an effective overall tax rate in France.
It should therefore be noted that this mechanism only makes it possible to avoid double taxation and not to pay less taxes!
Taxation of real estate gains
In The Usa:
The taxation of real estate capital gain in the United States is calculated in two ways:
– Ownership of the asset: less than one year (“short term capital gain”).
The capital gain from the sale of real estate is included in land income. The owner then falls back into the classic calculation of tax on property income.
– Ownership of the asset: more than one year (“long term capital gain”).
The taxation of real estate capital gains is made at two levels in the United States: federal and local. At the federal level, the rate is set according to the tax rate on property income. The lower slice is not imposed; the middle bracket is taxed at 15% and the upper bracket at 20%; Taxation more stable and more advantageous than French taxation.
At the local level, each state is free to set its own tax, which is added to the federal tax.
For example, Georgia applies 6% tax, California 13%, while Florida or Tennessee does not apply any capital gains tax. It is therefore important to ensure this criterion before choosing the city in which you want to invest in real estate.
In France :
Real estate capital gains realized on the sale of real estate in the United States undergo the same mechanism as real estate income, namely a double declaration (in accordance with article 13 of the Franco-American tax treaty) while avoiding double taxation. The mechanism is simpler for capital gains since a tax credit equal to US tax is granted to French people in this situation. Finally, it is important to note that the capital gain tax may be temporarily exempted if the funds are reinvested in another real estate investment on US soil.