Tax on property income in United States

Taxation Researcher | January 11, 2023

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.

Rental Income

Income is taxed at the federal level and at the state level (at progressive rates). Non-resident alien property owners rents are by default subject to a flat 30% income tax withheld at source. However, the non-resident taxpayer can choose to report real property rental income net of expenses, subject to tax at the regular progressive income tax rates. Income tax at the state level is very dependent on the state where the property is purchased. Most states impose some personal income tax, with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, which have none. Rates vary but are usually below 10%.

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.

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 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

Federal Capital Gains Tax

Non-resident aliens are subject to a 30% tax withheld at source on US-source net capital gains if they are in the United States for 183 days or more during the taxable year in which the gain occurs.

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%