Is Dubai really tax-free? For a local Emirati, yes. For a US Citizen? Absolutely not. πΊπΈπ¦πͺ
In this video, Stephen Morris explains the specific tax and compliance landmines US investors face when buying property in the UAE. While Dubai offers incredible 0% income tax rates, the IRS still taxes your worldwideincome. And because there is no US-UAE tax treaty, you canβt claim a foreign tax credit for taxes you never paid.
We break down the exact math of a Dubai rental property on a US tax return, the specific depreciation schedule you must use (it’s not 27.5 years!), and the massive penalties for failing to report your foreign bank accounts.
In this video, we cover: ποΈ The Dubai Opportunity: Golden Visas, 0% Tax, and high rental yields. π Depreciation Rules: Why you must use ADS (30-year schedule) for foreign property, not GDS. π The Reporting Trap: FBAR (FinCEN 114) vs. Form 8938βwhen you need to file them. π« The “Corporate” Mistake: Why holding a Dubai property in a Free Zone LLC can trigger the dreaded Form 5471 (and a $10,000+ penalty). πΈ Capital Gains: What happens when you sell? (Hint: The US wants its cut).
β±οΈ Timecodes: 0:00 β Intro: Why Dubai? (Golden Visa & Safety) 2:15 β The βNo Taxβ Myth: US Worldwide Taxation Explained 4:00 β Calculating Your Taxable Income (ADS 30-Year Depreciation) 6:10 β Bank Accounts: FBAR & Form 8938 Filing Triggers 8:30 β The Danger of Free Zone Entities (Form 5471 Penalties) 10:45 β Exit Strategy: Capital Gains Tax on Sale
π‘ Planning to buy abroad? Make sure your structure is compliant before you wire the money. Contact Advise RE for an international tax consultation.
π Connect with Advise RE: π Website:https://www.adviseretax.com πΌ Services: International Tax Planning, Real Estate Consulting
#DubaiRealEstate #Expats #USExpatTax #InternationalRealEstate #GoldenVisa #FBAR #IRS #AdviseRE #StephenMorris
TRANSCRIPT:
Welcome back everybody, Stephen Morris here with advisory and today we’re going to set our sites globally and talk a little bit more about international. Specifically, let’s talk about the UAE and Dubai.(…) Now, as you know, and I’m sure if you’ve seen from a lot of our videos here on our YouTube channel, we’re very big proponents in diversifying your strategy, not just to be United States, but also abroad. Having multiple residencies around the world, as well as investments in cash around the world greatly support you in terms of your ability to grow, ability to have backup plans and opportunities, and also just to be able to generally travel and employ a different way of life. For that end, let’s talk about Dubai, one of my favorite cities in the world, one of the safest and most prosperous cities in the world, and also a place where I happen to have an Emirates ID. I tend to frequent the country very often, even though it’s very far from Los Angeles. And so let’s go into some concepts here that I think are going to be of interest to you, especially as you’re considering buying real estate abroad.
Dubai has a fantastic program as of the time of this video where you can achieve or obtain a golden visa, which is basically an Emirates ID, and the length is approximately 10 years. And if you make a certain investment, you generally speaking at the time of this video of over $300,000 US, then you’d be able to have this ID and travel and live in the country as long as you like. In addition, you may be able to consider that the rental market might be an attractive opportunity for you and you can buy rental properties, rent them out to third parties, and all this would be fantastic to support your international real estate diversification strategy. So let’s talk about how the tax impact and the compliance impact of all these things work out. Usually when folks talk about Dubai, they hear this concept of no taxes, right? And so it’s not true that Dubai has absolutely no taxes. They do have other taxes in different forms. But generally speaking, the income tax for personal individuals is 0%.
And for corporations, it’s going to be up to 9% depending on how you incorporate. That’s for a different discussion. So let’s just take the example of you own a property outright as a freehold in the city of Dubai, and you rent it out to third party for annual rent, and you earn $50,000 here in rental income.(…) Dubai, they will tax you at a rate of 0%.
Unfortunately, you’re watching this video, chances are you’re at least a permanent resident United States, if not a US citizen. The US is going to tax you regardless of where you make that income or where you live because the US taxes from all worldwide income regardless of your residency.(…) Because Dubai has no tax on their taxable income, there’s no foreign tax credit for you to offset your US tax liability. And so your taxable outcome is going to be something like $50,000 minus related expenses.(…) And those related expenses could be in the form of maintenance, property management, ancillary type of expenses, and also depreciation. Now, appreciation for property is actually set on a different schedule than property that’s situated with the United States. In the US, we use something called MAKERS, or Modified Accelerated Cost Recovery System. And for residential real estate, for example, that recovery period or that depreciation lifetime would be 27.5 years. However, if you own real estate abroad, you are going to be on something called ADS, or Alternative Depreciation System. And so the depreciation timeline is actually going to be over 30 years, which results in a slightly smaller deduction every single year since the timeline is just a little bit longer. After depreciation, you might have a taxable income resulting from the property of, let’s say, $10,000. And that gets added to your tax return on the US level. You’ll put on your form 1040 under Schedule E, and you’ll pay taxes based on your own marginal tax rate. That’s pretty simple, pretty straightforward, but there are some compliance requirements you’ve got to consider as well. Let’s say, for example, you’re collecting that money, and it’s going to a Dubai bank account. Most likely, your tenant’s not going to be interested in paying your US bank account because the transaction costs would be quite significant.(…) If at any point during the year, that bank balance gets $10,000 US or more, even for one second, then you’ve got a filing requirement that gets triggered. That’s called Form 114.(…) That would be to FinCEN. That is basically called the FMR. So it’s Form Bank Account Reporting.(…) And basically, you just need to report your balances, where the account is located, what the account number is, and what the highest balance was during the year. There’s no tax that gets triggered from this filing. It’s just simply that the US government wants to know where you have your money. Where is it coming from? And so if you fail to file this annually, then it is a $10,000 penalty for failing to do it. And the defense of, “I didn’t know I had to file it,” is not a valid defense. They’re still going to issue a penalty.(…) In addition to that, there might be an additional tax filing form depending on the balance of your bank account that sits in Dubai. And that would be Form 8938. It functions very similarly to the 114, except the 114 gets reported to FinCEN, and the 8938 gets sent to the IRS. Why don’t they talk in communicating uniform forms? I don’t know. I’m not a government bureaucrat. I can’t really explain the logic of how these things work out. But that’s an additional filing requirement that you might have.(…) So let’s talk about another particular outcome. What if instead of you owning that property directly, instead you own it through a free zone LLC or some sort of corporate entity? In that particular instance, your filing requirements have actually increased.
Now, there might be a reason to do that for some sort of tax outcome or some sort of beneficial planning. We do talk about that, and I have a link below in terms of leveraging the corporate structure in order to save taxes abroad and internationally. But regardless, whether you have a free zone entity or something along those lines, you’re going to have to also file Form 5471, which I’m going to tell you right now is a monster of a form. It has a ton of schedules behind it. And again, this form doesn’t necessarily trigger a tax. It’s simply information filing that you have to say, “Hey, here’s all the money I’m making from the corporation. Here’s all the owners around it. Here’s income and expenses.” And there’s a whole lot of other ancillary forms that relate to it. It takes a long time to fill out. Failing to file this form does two things. Number one,(…) $25,000 penalty. Period.(…) Number two, it leaves the statute of limitations for your tax return open forever because they’re going to consider that return to be not completed or not fully filed. And so even if you forget it 10 years ago, the IRS can come back in and reassess penalties plus interest, all that other good stuff, even if it happened 10 years ago. Finally, when it comes time to sell the property, then you’re thinking, “Great. I don’t have to pay on capital gains because the capital gains and buy is zero. No tax on capital gains and buy.” Unfortunately, as a US citizen or permanent resident, you will also get tax on capital gains here. They’re going to compare on your tax return the basis of the asset and to buy after you’ve taken depreciation on the ADS schedule, as I mentioned, against the amount realized to come up with the amount recognized for capital gains. Again, that’s going to be filed on your tax return like any other capital gains, most likely intersection 1231. And you’re going to pay a long-term capital gains rate if you held it over a year. And if it’s less than a year, then it’s going to be on a short-term capital gains rate, which is at your marginal tax rate. So all this is to say that, again, not trying to scare you on the outcome here for Dubai. It’s a wonderful place to invest. It’s also a wonderful place to visit. It’s an exciting, exciting market in order to experience. But the things you have to keep in mind is anytime you step a foot outside the United States, whether it’s Dubai, it’s any other country in the world, your filing requirements do step up quite a bit. And you’re going to have to consider these type of forms and these type of considerations before you move into these type of investments. Otherwise, the penalties can far outweigh the profits that you’re hoping to achieve. For that end, make sure that you contact us and we’re happy to advise you before you make that next step into international how to get your visa residency in those countries, as well as the reporting requirements and tax considerations that you have as well. And some countries are able to access treaties. I really hope this helps out a lot. If you’d like to engage or find out more, feel free to contact us here. And we’re more than happy to help you as you consider your next step to move abroad or invest internationally. Thanks so much for watching. So make sure to like and subscribe to our channel for all the content related to real estate investment and tax saving strategies.
