How Are Americans Taxed When Investing in Dubai Real Estate?

Brokers in Dubai will say tax-free, as in if that's the case for everyone. You and I both know that is not the case for Americans. But Americans still want to understand what are the tax implications and how can we strategize to minimize it. And I'm going to hand it over to you because you are the one that can guide them. When you move out of US permanently and you are a US citizen or green card holder. So now we are restricted to two categories. US citizen green card holders you are still liable to report to IRS your income that is subject to taxes but there are certain exclusions only a US accountant he got surprised when I told him that you know in Canada if you leave the country and you cut your residential ties you don't have to file any tax if you don't have a Canadian source income um real quick he really got surprised when I told him that in Canada if you cut your residential ties and you don't have a Canadian source income you don't have to file a tax return you don't have to pay any income tax California does not recogn recognize foreign tax credit for that country and you are in California so that number might get wider so one variable is a state second variable is where you bought the property whether there's a personal tax there or not third variable is that property is used for so this is assumption of long-term residential in US if you bought under LLC that doesn't matter but in UAE if you bought under a free zone company or free zone LLC or even mainland LLC it will matter what if somebody opens a corporation or a trust here in the UAE and keeps their money in the UAE is it still in the trust and corporation that 10,000 reporting the criteria is if you own that account or if you have a signing authority okay is there any financial benefit or tax benefit for an American to create a corporation here and buy the property in the corporation name just purely financially I don't see anything if you're an American earning income in the UAE or you live in the United States and own an investment property in Dubai what do you actually owe in taxes y'all keep asking me this because living in a taxfree country does not automatically eliminate your obligations back home and the way you earn, own, and structure your investments can make a major difference. Today we are going beyond general tax advice and working through two case studies using real numbers. First, a US person living and earning income in the UAE who also owns investment property here. Second, a US person who continues to live in the United States but owns a UAE investment property, which is my most common scenario. What income must be reported? Which exclusions, credits, deductions, or ownership structures could apply? What mistakes could cost you money? And most importantly, how can you plan legally and efficiently before you invest? My guest is air with Venshin, an enrolled agent in the United States based here in the UAE who specializes in helping North Americans navigate these crossborder taxation questions. I'm Gigi Bonitez, a certified international property specialist, a California licensed realtor, Dubai real licensed broker helping global real estate investors invest right here in Dubai in the greeter, UAE. This episode is for educational purposes and is not individualized tax, legal, or investment advice. Your circumstances matters. Um, so always consult a qualified professional such as Amir before making a decision. Now, let's get into the numbers. Hi Amir. Hello. Welcome back to the Dubai Connect podcast. Thank you. It's great to be back again. I love having a source of someone who really understands. Look, not all of my clients are Americans. Okay. I have really luckily attracted with the Dubai Connect podcast a global Englishspeaking base, but the majority are Americans. And since I am based both in the United States of America and California, San Diego, licensed and performing real estate there and here in Dubai and really probably one of the only people doing what I'm doing, which is helping Americans fully understand the UAE market, it's really important to have a go-to person that understands their pain points. Because what I find, Amir, is that a lot of brokers in Dubai will say taxfree as in if that's the case for everyone. You and I both know. Yeah. That is not the case for Americans. But Americans still want to understand what are the tax implications and how can we strategize to minimize it and I'm going to hand it over to you because you are the one that can guide them. Talk to us. Thank you. Okay. So let's start with a basic general ground rules so that everybody is at same page and then we can move to the specific scenarios. So um as a US person your worldwide income is subject to taxes. That's the general ground rule for anybody and when I say US person it means a US citizen, US permanent resident or someone who has met significant presence test or maybe few other categories um they would be uh subject to their worldwide income is subject to US taxes right okay second principle when you move out of US permanently uh and you are a US citizen or green card holder so now we are restricted to two categories US citizen green card holders um you are still liable to report to IRS your income that is subject to taxes but there are certain exclusions right certain exclusions and benefits or credits which may help you but uh you still need to continue doing that. So when I was talking to another accountant who is only a US US accountant um he really got surprised when I told him that in Canada if you uh cut your ties residential ties and you don't have a Canadian source income you don't have to file a tax return you don't have to pay any income tax Canada CRA would even know and wouldn't even want to know what you earned in Dubai or wherever you are living so that was a big surprise for him so yeah but unfortunately in US you are citizen or per green card holder you have to report and file but you do get some uh benefits or you do get some uh relief. So first relief is foreign earned income exclusion and foreign housing exclusion which is a big relief especially for people in UAE and the reason is the other two might not be relevant here. The second one is foreign tax credit but if there is no personal tax obviously there's no foreign tax credit and the third one is you can get some benefits out of the treaty and unfortunately there's no treaty between US and UAE. Okay. So that's the ground rule. Now we will take example of uh a basic scenario where there is a couple Mr. Tony and Miss Tina kind of a tongue twister. Okay. Um they earn let's say US dollar 100,000 each. Okay. For the sake of simplicity they live in Florida. Okay. So there is no state tax, right? and uh they have a property in first scenario we will see that they have a property in um Florida and in the second scenario we'll see if they have a property in Dubai okay we'll take the same amount and same rental yield and you might be a better person to describe the rental yield but as per my understanding rental yield means or what I have assumed is your rental income minus eligible rental expenses which are like you know whatever you are paying for your you know maintenance other charges property tags whatever um but you know and I know those yields are not same in both the countries but just to keep apple to apple I have taken the same numbers right okay and we will see that how much is a difference because there's often a perception that um if you invest into a foreign asset or foreign uh real estate there might be some different tax implications so in this case we took these scenarios 5% rental yield property value is equivalent of a2 million roughly $544,000 US dollars and um 200,000 of income. So let's take a scenario that there's a couple Mr. Tina and uh M Mr. Tony and Miss Tina kind of a tongue twister. Um they earned 200,000 combined let's say 100,000 each. That's their W2 income. We are talking about how much would be their tax on 1040 for each year when in the first scenario they own a property in Dubai and uh in second scenario they own the property in Florida just to keep it apple to apple the value of property is same which is roughly 2 million dirhams or $44,000 rental yield is also assumed same which is 5% and rental yield is defined as your rental income minus your eligible rental expenses like you know maintenance and whatever other expense you do it does not include financing. Um so same assumptions and now we will see that what is your income tax at the end of the year what the last number on your 1040 as a tax owing would show uh when you own a property in Dubai versus the similar numbered property in Florida. So the diff so um when you own the property in Dubai your income tax for the year is 29,444 and when you own the property in uh Florida your tax is 28,684 so the difference is only $240 why and that minor because everything else is same it's treated the same way as far as your income and expenses are concerned your it goes into same schedule E same treatment the only difference is and that's a very minor difference that The depreciation that you take on a foreign property is over 30 years versus the depreciation that you take on a US property is over residential properties over 27.5 years. Okay. And by the way, we are assuming here that it's a long-term rental. It's not a Airbnb or other stuff. Okay. So the difference is only minor. So the general perception that if you are doing if you're investing into a a a foreign asset especially uh foreign real estate, there might be some very different tax implications. That is not true. It's pretty much same. Okay. Right. And uh but there are things which can you know swing the difference. First thing could be states. Different states have different rules, right? Uh here for simplicity we assume Florida but it could be very different for other states and especially and and also it it depends on where you own the property. it makes sense for Dubai but for some other country where let's suppose you have a local tax to pay and for example California does not recognize foreign tax credit for that country and you are in California so that number gap might get wider right so uh one variable is a state second variable is where you bought the property whether there's a personal tax there or not third variable is that property is used for so this is assumption of long-term residential if the property that you have um bought or you have used uh is actually giving hotel-like services not just Airbnb. Airbnb is still not that much hotel like. Okay. Hotel like means when you are giving additional services during the stay. For example, meals, for example, regular cleaning while they are staying. Right. So these kind of services which more tilt towards a hotel-like services that's where it is considered a small business or self-employment and then it triggers self-employment tax. it triggers in to offset some of that taxes also triggers what is called a QBI deduction qualified business income or investment deduction but that QBI is specifically available for US asset that's where that there will be a different so that's why our advice was very general but a specific case in a specific activities it can swing [snorts] in some other way another factor is we are assuming it's a passive investment if it is a material participation We have discussed in our previous podcast what that specifically is. I'll send you the criteria. Um so if it's a material participation, if it's active real estate, then you get much higher deductions uh in your tax return. And likewise uh another factor is if your your there's another thing in US tax return which is called net investment income tax which is beyond a certain level of AGI or modified AGI AGS annual adjusted gross income. So if it is more than $250,000 um then there's an additional tax on your investment. So the number we are discussing might be different due to that. And uh another thing which might be a very you know kind of a um people might not think about it is if two US person are buying that property not the spouses to one related US person. Okay you know you and your colleague might pull together money and buy a property in Dubai instead of getting mortgage and everything they put their money and they buy bought the property. Depending on some variables, it may be treated as a foreign partnership. Okay. And how does that affect the tax implications? That will not affect your taxes, but that will affect your reporting. Okay. Because there's a very so whenever there's a foreign entity involved and that is that was my next point as well that this is assuming that you have bought the properties personally in both cases, right? In US if you bought under LLC that doesn't matter but in UAE if you bought under a free zone company or freezone LLC or even mainland LLC it will matter first of all it will matter for the capital gain that we will discuss but secondly it will also matter because if you have bought under the company then from US point of view you own you have a controlled foreign corporation right which has its own set of reportings and that is very complex and likewise in this Example, if two people are just pulling money together, they never created a cooperation in Dubai. They're just pulling money together. In some situations, it may be treated as a partnership. Okay? And that's a foreign partnership. So, it would be you you know um uh subject to additional reporting. Okay. And the the penalty of missing those reportings is quite high in thousands of dollars. Okay. Right. So tax might be same but the compliance burden would be much higher. Okay. I understand what you're saying and that's why it's important to work with someone such as yourself that understands exactly how the international reporting yes to be able to and one thing which would be so in a actual baseline scenario there would still be an additional there may be an additional reporting besides what we discussed is FBAR reporting foreign bank account reporting if you have a bank account outside US more than $10,000 US anytime in the year then you have to report all your foreign accounts to finen so that's annual requirement with the same deadline as your taxes and people might miss out. They might think, "Oh, there because obviously when you have a property, you might have an account, you might have money accumulating there and it can cross $10,000 very soon." Uh maybe in one year's rent it might cross $10,000 if you don't have to take that money out. So that's but under 10,000 you don't have to report it. Yeah. But that's collective. So for example collective if I move from Canada I had $5,000 in my Canadian account $5,000 and then I have uh another account in Dubai. So collectively that might become understood. So so that that's a basic reporting which will still be there and it's not that scary. Okay. The scary part is when you have foreign reporting for control foreign corporation or foreign trust or foreign partnership and that's why often people ask that you know why should we make a a corporation or an LLC or a free zone to buy a property in UAE that would be you know I wouldn't say that's a no-go area but then that requires a lot of planning that will increase your compliance burden so if you are a typical taxpayer in US who wants to have things simplified. Do not go there. Let me ask you a question. What if somebody opens a corporation or a trust here in the UAE and keeps their money in the UAE? Is it still in the trust incorporation? If it stays within it, does that still trigger that over $10,000 you have to report that? Okay. So, that 10,000 reporting uh the criteria is if you own that account, okay, or if you have a signing authority. Okay. So, that would also trigger that. So what if I what if I wanted to create a corporation here but I don't have the signing authority? Do I have to have the signing authority? Then that would be an operational or logistic issue here. I mean if you create a corporation there's a bank account you don't have a signing well if you created the corporation anyways you I am going to be assigning authority of course because it's my corporation. So if I create the corporation obviously it's going to have more than 10,000 in it. So it has to be reported. Yes. By legal. And that's that's not a scary part. The scary part is there's another reporting which is called form 5471. Okay. And that is a form which has five categories of filer for that form only. Whether it's a category 1 2 3 4 5 filer you can be multiple category filer at the same time. And that is more often the case and for each category of filer there are certain level certain schedules to be filed and if I remember correctly the schedule goes from schedule A and I remember up to schedule Q. Is there any financial benefit or tax benefit to buying property for an American to create a corporation here and buy the property in the corporation name just purely financially? I don't see anything right unless there is some corporation already there they have funds there they want don't want to take it out and have a personal income that's separate story but otherwise separately for that creating a corporation might not give you any significant benefit right so yeah so there are different variables which can affect your filings which can affect your compliance burden if not taxes so you have to look at all the things and the the idea is keep it simple right that will that will save you a lot of trouble and even when you keep it simple uh because it's foreign it's better to consult someone some professional and otherwise uh your scenario remains same whether you invest here or you invest there right now in reference to these two we will see another scenario where this Mr. Tony and Miss Tina are have now moved to Dubai. Okay, they still own that property as a rental property. They're living elsewhere. They own that property. Same 2 million property, rental yield 5% everything. And now let's see what happens to their their scenario. So they assuming they earn 100,000 each, right? Um there's a very good thing which we discussed initially foreign earned income exclusion. So it allows you to exclude a certain amount of income from your tax calculation, right? And the number varies every year. The number for 2026 is $132,900 US. Yes. Right. That's a big number. Yes. And that's individually. By the way, it cannot be clubed together for husband and wife. Even if you are doing a joint return, you cannot club that. I mean, if let's suppose um Mr. Tony is earning 50,000 and Miss Tina is earning 150,000. Uh so you cannot say that okay this guy had 132,000 limit this guy other person 132. So it can overall it becomes zero. It doesn't work that way. Okay. Right. It cannot be clubed together although you are filing a joint return. But for each person individually is 132,900. Okay. To make it even better there is a foreign housing exclusion. Excuse me. Before we go to the foreign housing exclusion for that foreign earned income credit, do you have to be salaried to be able to because I think I believe the way you receive that income. Okay. So that is for your earned income. Earned income means salary or the business. Yeah. Right. So um not the salary. It could be business but it could not be your investment income. Does it matter how that's received in your bank? So for example, let's say I'm salaried. Mhm. And let's say that's received though into my business account in the US. Does it matter? You are salaried in UA and you got it in the business account. Um, generally as long as you can prove that was genuinely a salary thing. I mean that might raise a flag but as long as you have documentation to support it that I'm actually working it's not just a paper on paper employment and how long do you have to be outside of the United States? Yeah, that's the tricky part. So, so first thing was investment income is not part of it only earned income. And second criteria is you have to be outside of US for 330 days or maybe 331 days. So 330 days. So but that other remaining days it can be spread out throughout the year that you were in the US, right? It doesn't have to be 330 consecutive days. And you can be anywhere. You can be that's what I was going to ask you. You can be anywhere. So for example, I was living in Spain for 14 months. But in that time that I was living in Spain, first of all, it wasn't January to February. I mean January to December. So it does it doesn't have to be a calendar year. It's any 330 days out of 365 days but you get then prorated um right foreign earned income exclusion. So because that happens most of the scenario nobody moves only on January 1st and then I was out but even though I was in Spain living for 14 months the majority of my time was actually here in the UAE. So I think I bypassed Spain taxes because I wasn't really living in Spain and I wasn't um working in Spain. I was actually here which is income taxree and I was out of the United States for more than 330 days. So therefore for me correct okay so depends when you start your cycle for that 331 days. Um let's suppose you start your cycle in October right so October, November, December. So you would get proa of you know whatever is 25% roughly of that limit for that year. Okay. And in the next year you would get you know 75% but assuming you were totally living in UAE after that. So you would get the full limit of 132. So it can be prrated. Um but you cannot the bottom line is do not spend more than 1 month in US. That's the key criteria for the whole throughout the whole 12 month period. Okay. And for people once they once people have moved then it's a calendar year. So it's easier to explain from the calendar year point of view between January to December in a full year when you are not not a U US resident do not spend more than 1 month that is the only criteria for people from other countries like Canada it might not matter because they get foreign tax credit got it right and the Canadian tax rate is higher so it doesn't matter uh even if they can can't claim this part for an earn income exclusion because in some cases that one is better but in UA unfortunately that's not a choice the only relief you have is earn income exclusion and for that those number of days do matter and before you go for that just make sure you read the exact definition of number of days because they have given a very detailed definition if you are transiting whether it's included or not and a lot of other details right okay so so yeah so so that's a good thing and to make it even better there's a foreign housing exclusion okay explain that and foreign housing exclusion is in addition to this 132 900 you also get uh a housing exclusion which is kind of a another exclusion or reduction of your income for taxes uh because you have to pay your housing, right? And they have a again the amount changes every year but they have a ceiling and they have a floor. Okay? Right? So their ceiling is roughly 16% of uh uh that's 130 to 900 which comes out to be um 130 to 900 is the earned income exclusion. Okay. And the ceiling and the and the floor the difference between ceiling and the floor. So floor is what they will not consider. So 16% and the ceiling is roughly 27%. So they are considering almost 14%. Okay. Right. So and that is 21,264. That is that is also a credit. That is further exclusion you can have from you. So is that for but that would be for the couple together. Yeah cuz they are sharing 132 and then plus that number. Okay. To make it even better that ceiling gets adjusted for different cities. Oh. depending on the cost of living. Ah, interesting. Right. So, Dubai ceiling is almost double of the standard ceiling. Okay. And Dubai ceiling is uh uh almost 57,000 and that would mean in if so there's a calculation involved but the bottom line is you can have another 35,000 excluded. So in a the standard number was 16,000 excluded. Sorry if I said 24 16,000 excluded and uh in Dubai ceiling that is 35,000 excluded from your income. So 132900 plus 35,000 that gives you 168,000 almost that you can exclude from your income. So there is some hope you just have to move out of the US. Yeah. So once you have moved out um in case of Mr. Tony and Miss Tina um their income we assume 200,000 100,000 each. So everything gets adjusted. the only amount left is their uh rental income and their standard deduction because when you move out you still get the standard deduction the standard deduction is more than that they don't end up paying anything okay right so that's our third scenario right and the last thing we would discuss is we you discuss about capital gain right yes so that is important this is a very important question because air I'm always asked about how are capital gains figured for an international investment and obviously I'm not a tax advisor. So that's why I always say well it depends on your scenario, your income, your investment. But then really I just want to refer them to you because I don't I'm not comfortable answering that question. I agree. Okay. So the good part is the the capital gain treatment is again same whether that's local or international. Okay. Okay. So first thing uh and in US the capital gain depends on different variables. First variable is whether the short-term or long-term. Okay. If a shortterm it is treated as an ordinary income. So just like your income is tax W2 income it would be same way. Um and that the criteria is if you hold under 12 months any asset whether that's so once it's over 12 months then it's becomes longterm and it triggers the long term. Yeah. So whether that's a stock that's real estate whatever it is uh if you hold for more than less than 12 months shortterm short-term treated just like regular income right. Um and if it's long-term uh if it is held for more than uh 12 months it is long-term then you have certain tiers of rate okay 0% 15% and 20%. Right. And not just tears of the rate uh those tiers of the rate depend on your income adjusted gross income and to make it more difficult and that's why I have this iPad with me because I can't remember all the and they change the numbers often every few years uh for a lot of these things. So first uh there are different tiers 0 15 and 20. Then uh there is a certain income level. If you are within that income level you would be your capital gain would be zero. The if it is you know you are beyond that income level to second bracket your gain would be 15 or otherwise it would be 20. Right? So two people selling similar properties similar gain might have different capital gain rate because they their overall income was in a different bracket. Right? And in addition to that that is further ch affected by your filing status single marit filing jointly marit filing separately. So you can show the whole table but just to give an idea we'll take the example of an single. So up to 49,450. If your income is within 49 let's almost $50,000 then your uh capital gain is zero. If your income is between 50 to 545,000 which is a big range it's 15% and then over 50 545,000 it's uh 20%. So it's quite a generous bracket. So most of the people will fall into that 15% bracket I would imagine but maybe if you had a super high gain possibly you might fall into the third bracket as well. So you should account for 20% if you are you know close to the bracket especially when you are planning to sell. Um yeah that's important because that's where there's no withholding and the point is you will have to eventually uh pay at the end of the tax year and it can come to bite you if you have already spent that money. Yes. But there's a good news. What? Tell me there's good news with taxes. Wait a minute. That I don't know if that goes together. We discussed earlier as well in uh that there is a so normally people think that 1031 exchange which is more common in US uh people do it domestically in US uh and for those who don't know it's a concept where you sell an investment property and you buy an another investment property within a certain period of time and if you do that and you meet certain conditions then you don't have to pay tax on that capital gain. It kind of you defer it you it kind of gets deferred. Yes. And we don't have anything like that in Canada by the way. Oh, I didn't know that. Yeah. Yeah. Canada you just I mean even if you buy okay you pay tax on that one and you move on. Okay. Every property is different. So yeah. So that's different and that's good thing for uh US people 1031 exchange. And the good news is that can be done in your foreign property as well. Foreign to foreign foreign foreign domestic domestic. Yeah. This is I I want to explain this because I went through probably 50 experts before I got the answer from an American. 1031 exchange in the United States can be done foreign to foreign. Yeah. And domestic to domestic but you cannot do it domestic to foreign. Exactly. So it is foreign to foreign. You can sell your property in Dubai, buy in London. Whatever you want to do, you can do it. Um but uh secondly, it has to be with the same ownership. Yes, that's important. And most important and tricky part, it has to be through a qualified intermediary which is sometimes difficult to find um here in UAE. But I have it. But you have one. That's why people should come to you. Okay. And then there's a 45 just like local uh 1031. There's a 45day window for identification. There's a 180day window to um you know uh to your to close the deal. Um which is why it doesn't work for off plan. It only works for ready. Yes. So it will definitely work for for your regular on plan properties. And then you have to reinvest all your proceeds otherwise the remaining amount would become taxable income. there has to be same owner on the both sides and then you have to report it in a certain form which is called 8824. So, so yeah, there there there is a hope, there is a way to avoid or defer, not avoid, I would say defer that capital gain. Correct. Um, you just have to play your cards, right? Bottom line is if you're not going to get away from taxes, but there are ways to structure to potentially minimize it. Exactly. And even if you are doing like you even mentioned like the hotel type of services where you can find a way to track your hours in order to legally structure it as well. All this is way too over my head and that's why you have the additional education for this which is why I'm so glad that part of my offering um at GGB international is to have a source like you to really help my investors structure properly and report properly and be in compliance so to avoid the additional fees and be within legal requirements and to make as much profit as they can. So if I have to summarize it in one line, do not get creative in your international tags. Yes. Just looking at that Tik Tok video that you saw. Yes. [snorts] Okay. There are so many advices out there and yeah, you have to be I mean if you want to do something then just hire someone and get the proper advice and see not everything is for everyone, right? So we have to see what what really works for your scenario and that's where a professional comes into play. Now, I love the scenarios that you brought up, but I want to say one thing. Those rental yields are not apples to apples comparison. Um, first of all, without even including property taxes and even just getting into the market with the price to get in and the opportunities to do short-term rentals and the demand and what's happening, that's not an applesto apples comparison. Dubai is offering so much opportunity and there's the lack of property taxes which eats heavily into American property owners profit margins. True. I totally agree. The rental yields are in practical never same and even your capital gains are never same. Correct. Right. They are significantly different. Investing into uh a particular city in Florida wherever in US versus Dubai which is kind of a hub for so many nationalities. You can just look at the amount of investment flowing in into these countries versus you know US um especially in real estate sector that tells that a lot of people are coming moving going so there's a lot of movement where there's a movement you make money correct and with you you help us keep our money definitely thank you thank you thank you I hope that that was helpful of course if you have more questions like this you can drop them in the comments I'm happy to also connect you with air if you're looking to strategize properly And this is what part of my offering is. So if you're looking to invest in the UAE, but you want to do it methodically to maximize your profit margins, please reach out to me and make sure to like, subscribe, and follow and wait for the next episode of the Dubai Connect podcast. Thank you.