As with many tax concerns affecting real estate, in acquisition, its ownership and its disposition, the issues are magnified when dealing with citizens of foreign countries. The issues relating to how we should handle purchases, management or sales of Hawaii real estate when dealing with non resident aliens who are not US taxparyers (called nonresident aliens) are unique and often not fully understood. How a nonresident alien owning real property in Hawaii will be taxed for US income tax purposes depends in great part on the status of such individual as such is determined by the IRS. Remember, as a general rule, the United States Treasury Department cares little about how the revenue agency of the country from which the nonresident alien comes, classified such person for either residency or immigration purposes.
1. What or Who is a Non Resident Alien (or better stated, Who is a United States Resident)?
a. Rule for immigration versus tax purposes. The test of whether an individual is considered a resident of the United States differs depending upon whether the discussion is about income taxation, estate taxation or immigration. While it may be very difficult for a citizen of a country other than the United States to be treated as a resident for US immigration purposes, and fairly difficult for such person to be considered a resident for US federal estate tax purposes, it is relatively easy (and in many cases, even inadvertent) as to how a foreign citizen can become treated as a resident of the United States for federal income tax purposes.
b. True Foreign Citizenship versus Dual Citizenship. Not all foreign citizens are, however, created qual. While most citizens of countries outside the United States will hold citizenship only in that country (or in that country and some third country other than the United States), there is a growing group of indiviuals that hold citizenship in both the United States and their home country. These dual citizens are automatically considered US taxpayers for United States federal income tax purposes.
c. How Does a Nonresident Alient inadvertently become a US Taxpayer? Increasingly, we see foreign citizens inadvertently becoming US taxpayers without intending to make such an adjustment in their status for US tax purposes. If a foreign citizen fails either of the two tests that are currently in use under United States tax law to determine his or her status for the income tax purposes, then they will be considered for income tax purposes to be a United States resident.