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Dear Tax Talk,
My wife is a nonresident alien and I am a U.S. citizen. Our family of four lives overseas at the moment. I own a mortgage-free property in California that is used as a rental. We file tax separately; in other words she doesn’t pay U.S. tax on her income. And my tax pay to the IRS is minimal since I am not working.
We are thinking about buying a second property in Southern California as an investment, as we probably won’t move back to the United States in the next few years. We (mainly my wife) will put down $400,000 and get a mortgage loan of about $400,000. It is correct that we won’t get the benefit of deduction on real estate taxes and mortgage interest payments, right?
What would be the tax consequences for my taxes and my wife’s taxes then? I assume in this case my wife is also subject to federal and state tax? Is it better, regarding tax, to buy the second property and use it as my primary residence when we move back in a few years for job and children’s education reasons?
In tax terms, we call yours a mixed marriage: a citizen and a nonresident alien. One of the key differences for a mixed marriage is how the estate of a nonresident spouse is taxed versus that of the citizen.
A nonresident who owns U.S. real estate will pay estate taxes on the value of the real estate in excess of $60,000. Additionally, depending on the total assets of the non-resident, only a portion of the mortgage will reduce the value of the property for estate tax purposes. If your wife were to unexpectedly pass away while owning an $800,000 home in the U.S., the estate tax could be easily more than $300,000.
Alternatively, if your wife put the home in your name alone, the first $2 million in estate assets is exempt for a U.S. citizen. In addition, you would be able to claim the interest as a deduction on your return if you used the property as a second home. If the property was not used as a rental, the interest and taxes would not provide your wife any benefit.
If you move back, you may want to consider occupying the current home you rent as your primary residence in order to get the $500,000 exclusion on the sale. I would assume since you’ve owned this home longer it probably has greater appreciation built in. If this doesn’t fit your lifestyle, then occupying the new property for the requisite two years is a sound alternative, but does not affect in whose name it should be placed, assuming your wife will become a resident when you move back to the United States.
There are many advantages and disadvantages that you need to consider. I suggest you consult a CPA qualified in international tax matters to discuss your options, depending on your particular circumstances.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.