U.S. Tax Primer for Vietnamese Investors: Income taxes VS. Capital Gains

While I am certainly not an accountant or tax attorney, there are some simple questions many of our investors here in Vietnam ask me when they begin exploring the U.S. market which I am comfortable answering, and this is one of them.  It is a very relevant question, especially for investors considering real estate and other long-term, substantial investments in the U.S.

As is the case in most countries, the U.S. government collects taxes whenever anyone generates money through their business activities.  If the money a person makes was generated by work or services they provided and for which they were compensated, that is “income”.  Income is taxed in brackets in the U.S. – the more you make, the more you pay.  (Remember: employment income can ONLY be generated by a person who is authorized to work in the United States.)

In contrast, a “capital gain” is money someone generates through a transaction for which the make a profit – for example, selling a property you bought at lower price years ago for a good price today or selling that Microsoft stock you bought 10 year ago and making a nice return.  While the law doesn’t use this language, I would describe it generally as the difference between “active” profits and “passive” profits:  income taxes are paid on money you generate from your work and labor; capital gains taxes are paid on profits you generate from making smart business decisions.  A few key things to remember:

  • Capital gains tax rates are substantially lower than income tax rates, so better to make money in the U.S. through passive investments.
  • Income taxes are collected not only by the U.S. government but also by many states, while capital gains are only collected at the federal level.  For example, California has a high state income tax rate on top of the federal IRS tax rate, while Florida does NOT have any state income tax. 
  • Capital gains taxes are made by whoever generates profits from passive U.S. investments, whether the person is a U.S. citizen or resident or a foreign person.
  • When a foreign person generates a profit in the U.S. via a capital gain, the IRS requires the party distributing the profit to withhold the capital gain taxes before giving the profits to the investor.
  • In order to maximize future tax savings, it is critical for Vietnamese investors to carefully assess and plan their tax strategy BEFORE they arrive in the U.S. as residents.

Takeaway for Vietnamese investors looking to participate in the currently booming U.S. real estate market:   it is always best to generate your profits as capital gains.  While places like California, Oregon, and Washington are traditionally where Vietnamese investors look for real estate opportunties, these are highly competitive markets with few true opportunities for passive investment.  AVS Capital offers both private equity fund and direct ownership real estate investment opportunities in the booming South Florida market, which remains wide open with opportunities for shrewd investors.  Send your questions our way!