Whether you plan to co-own property with a United States citizen or a non-U.S. citizen, the rules of the game aren’t too different. Noncitizens can inherit property. They may be named as beneficiaries on financial and insurance accounts, just as citizens may. And whether you own jointly with citizen or resident, you’ll each qualify for the current annual gift tax exclusion.
You’ll also qualify for the current estate tax exemption if you’re under the cap. Specifically, there is no estate tax on the wealth of people who pass away with (as of 2020) less than $11.58 million (twice that amount per couple). The non-U.S. citizen spouse can inherit up to the annual cap without owing federal estate tax. (This attractively high estate tax exemption could expire within the next few years.)
Now, those basics aside, here are a few special property ownership rules and tax provisions worthy of note.
Home Ownership and Estate Planning When One Co-Owner is a Non-U.S. Citizen
If you’re a homeowner and you’re married, the law generally presumes you and your spouse own your property together equally. When one spouse passes away, unless the couple had vested their property otherwise, assets become the property of the surviving marriage partner. And with the unlimited marital deduction, federal estate taxes aren’t triggered by one marriage partner’s death, assuming both of you are U.S. citizens. Why is this? Between U.S. citizen spouses, the first to die passes assets on to the surviving spouse because the Internal Revenue Service (IRS) treats the couple as one financial account, so tax isn’t triggered when only one passes away — no matter how much of value the person leaves behind.
In contrast, if a citizen marries a non-citizen and the citizen dies first, the IRS deems their whole marital home value as within the deceased citizen’s estate. The only exception is the value the non-citizen spouse actually “contributed” — that is, the value that the non-citizen spouse has proof of paying into their home ownership. These rules hold — even when the couple vested the home with the right of survivorship so that the surviving spouse acquires full ownership. There is a tax credit in the survivor’s estate for this delegation of value into the citizen’s estate; speak with your tax professional or estate attorney for current information.
If a citizen is the surviving spouse, the assets left by the deceased spouse do benefit from the unlimited marital deduction. But the unlimited marital deduction for gifts or bequests does not exist if the surviving spouse is a non-citizen. See Code § 2056, subsection (d)(1), Disallowance of marital deduction where surviving spouse not United States citizen. What is the rationale for this disparate treatment? The government is concerned that the surviving spouse might leave for a previous home country — with the untaxed wealth of the deceased citizen.
Workaround 1. Annual Gift Tax Exclusion
The key workaround here is the annual gift tax exclusion to a noncitizen spouse, which permits you to give your spouse up to $157,000 in value (the cap as of the year 2020). So, if you make a gift during life to a non-U.S. citizen spouse worth more than $157,000 (as of 2020), you’ll need to pay gift tax. To quote the IRS:
If your spouse is not a U.S. citizen, tax-free gifts are limited to present interest gifts whose total value is below the annual exclusion amount, which for 2020 is $157,000. There is no lifetime gift tax credit available to offset tax where such gifts result in a tax liability.
What does this mean in home-buying terms? If it’s the citizen spouse who pays for their shared home, half of any value above $157,000 is deemed a taxable gift to the non-citizen spouse.
Workaround 2. Qualified Domestic Trust
A couple with a sizable estate can consult with an estate attorney to decide whether to use the qualified domestic trust, abbreviated as QDOT. Upon the death of the first spouse, the estate goes go to the trust, which is overseen by U.S. trustees. The noncitizen, as the trust’s sole beneficiary, receives interest and income earned by the trust assets, free from estate tax, through at least one distribution annually.
These funds are still subject to income tax when distributed. Moreover, if the surviving noncitizen withdraws and of the principal assets they will be taxed, absent an emergency situation (“hardship exemption”). When the surviving noncitizen spouse dies, estate tax (if applicable) will then apply, and remaining assets go to subsequent beneficiaries named in the trust, such as children.
Noncitizens as Sole Owners of U.S. Real Estate
You need not be married to a citizen to hold title to real estate in the United States. Many green card holders are U.S. property owners.
Noncitizen residents, including residents with temporary employment-based visas, may receive mortgage approvals if their credit and employment histories demonstrate a solid ability to repay the loan. People based outside the country have the strictest rules and highest interest rates. Some lenders offer special assistance in this area, such as Emigrant Mortgage Company, a firm known for its work with the immigrant population of the East Coast.
A real estate agent or a real estate lawyer assists the buyer in finding a suitable home, as well as a mortgage specialist and insurance. Real estate lawyers charge fees to the buyers who hire them, whereas sellers pay the real estate agents’ fees. Your mortgage specialist will inform you of the costs, including closing fees, you’ll need to pay to buy your new home.
At Deeds.com we offer more guidance to international home buyers in our summary of real estate sales and taxes for non-U.S. citizens.
Pro tip: Use caution with lenders who charge exceptionally high interest rates if you are applying for a home loan. U.S. law protects buyers from unfair treatment and fraud. To learn more about the buying process and how to avoid predatory lending, examine the U.S. Department of Housing and Urban Development (HUD) website.
Before You Buy, Speak With a Professional About Your Specific Situation
International couples should hire a pro to help them go over the complicated estate and gift tax rules that could apply to them. Joint ownership with a noncitizen spouse falls under property and tax rules that change from time to time, have many nuances, and apply differently for couples in various situations. If you have yet to set out to buy a house together, hit the pause button before you start. Get advice from an experienced professional. Before buying your house, updating your will, or accepting gifts from family members, find out the tax ramifications.
Indeed, anyone interested in doing their estate planning whose intended beneficiary does not hold U.S. non-citizenship should seek out an estate planning attorney who has knowledge of immigration matters. The way marital responsibilities are shared could impact the path to citizenship for a foreign national — especially during the delicate two-year period of conditional permanent residence at the beginning of the marriage.
Become educated about the special property and tax provisions that apply to your situation. Prepare yourself to make sound, informed decisions and the benefits of your good planning will last throughout your lifetimes — and beyond.
Photo credit: Sebastiano Piazzi, via Unsplash.