You don’t want to buy foreign rental property in Colombia in 2017. In fact, you don’t want to invest in any country with a rate higher than 20%… or maybe even 10%.
Here’s why US citizens shouldn’t buy foreign rental property in Colombia in 2017.
When you earn money in a foreign country, you pay that country’s tax rate. Then you pay US tax on those profits. To eliminate double taxation, you get a dollar for dollar tax credit, called the Foreign Tax Credit, on any money you paid to the foreign country.
For example, let’s say you bought a rental property in Nicaragua which has a capital gains tax rate of 10%. You bought the property for $50,000 and sold it for $50,000, for a capital gain of $50,000.
You’ll pay 10% on that gain to Nicaragua, or $5,000. Then you’ll report the gain on your US return and paying the US long term gain rate of 20% (not including Obamacare tax).
Because of the Foreign Tax Credit, you get a credit for the 10% paid to Nica leaving 10% for the IRS. Your total capital gains paid will be the US rate of 20% minus what you pay to the foreign country.
If the US long term capital gains rate were to go 10% under President Trump, you would pay 10% to Nicaragua and zero to the United States.
Next, assume that same property were in Mexico with a capital gains rate of 25%. You would pay 25% to Mexico and zero to the US. If the US rate goes to 10%, you still pay 25% to Mexico.
The foreign tax credit also applies to rental income. It appears that net rental income could be taxed at 15% under President Trump. Thus, you don’t want to invest in a country with a tax on rental profit of more than 15%… at least, not until you know for sure what the US rate will be.
That is to say, you don’t want to invest in a country with a higher tax rate than the United States. If they have the same rate, no problem… you pay them and zero to the US. If they have a lower rate, you pay the US…. so it’s a wash.
Because the US rate for rental income is likely to fall, and Colombia has a very high tax rate on foreign rental property, you don’t want to invest in Colombia in 2017. An investment in Colombia is likely to cost you 17% more than other countries in the region.
Here are Colombia’s tax rates: DAN, MAKE A CHART
EFFECTIVE TAX RATE ON RENTAL INCOME
Monthly Income US$1,500 US$6,000 US$12,000
Tax Rate 15.47% 27.29% 27.31%
Net income from leasing real property is considered as ordinary income and taxed at 33%. Rental income is subject to 3.5% withholding tax on gross payments, which is considered an advance tax payment.
Taxable rental income is computed by deducting income-generating expenses (such as administrative costs, insurance, realtor or leasing agent fees, taxes, maintenance and repairs) from the gross rent. Property taxes are also deductible.
Capital gains from selling real property held for at least two years are subject to capital gains tax at a flat rate of 10%. The taxable gain is computed by deducting the following from the selling price: acquisition costs (as revalued by the consumer price index), costs of transferring ownership, and improvement costs.
Capital gains realized from properties sold within two years of acquisition are taxed at 33% for nonresidents.
What’s missing from the deduction column is depreciation. You get to take straight line depreciation on your US return but get no depreciation allowance in Colombia. This effectively increases your tax by about 5% per year.
The tax cost of investing in a high tax country such as Colombia becomes even greater when you buy using your US IRA.
When you form an Offshore IRA LLC and purchase foreign real estate in your retirement account, all rental income and capital gains flow into that LLC tax free. Because you pay no US tax on the income, any foreign tax paid is a cost that can’t be recaptured.
When you buy with your IRA, selecting a low or zero tax country can increase your ROI by 30 to 40%. Assuming appreciation is the same throughout the regain, focus on tax rates to maximize profits.
For example, Belize has no capital gains tax and no tax on rental profits. This is one of the best countries in the region for those buying in their retirement accounts.
I hope you’ve found this article on why you shouldn’t invest in Colombia in 2017 helpful. For more how how to take your IRA offshore, or to be connected with an international investments expert, please send an email to firstname.lastname@example.org or call us at (619) 550-2743.