Tax Considerations for Inbound Investors in US Property
Foreign Investments In US Real Estate
The United States has enjoyed a resurgence in foreign money coming to our shores to invest in stocks, businesses and, perhaps most of all, real estate. Whether this is to scoop up real estate deals or simply find a safe place your money a key first step is proper tax planning. The tax code provisions dealing with such “inbound” investments are very complicated and there’s always a lot of variables at play. Key considerations include the type of property you want, for how long you want to hold it, and what type of income you expect it to produce. While there is no substitute for professional advice here are some key concepts to keep in mind.
Regulations for Regulations
Be prepared to answer a number of questions dealing with who you are, where you’re from and where you got your money, especially if you are borrowing from any “financial institution” as part of the deal. The United States government, particularly the IRS, has for years tightening the noose on international banking and trade. Opening bank accounts or forming companies in many cases require you to complete “know your customer” style questionnaires asking about all manner of things including who will be the beneficial owners of your investments. Unfair as it may be this is even more difficult if you come from a country that shows up on certain lists, such as the OECD “gray list” of countries deemed uncooperative in sharing bank account and tax information, or the Financial Action Task Force (FATF) “black list”, a list of countries deemed not to be doing enough to combat money laundering. In the end, however, you can still achieve a measure of asset protection and anonymity by selecting the right entity and tax structure that will protect you while still keeping you in compliance with the thicket of regulations.
Withholding Your Money
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was designed to prevent foreign investors in US real property from selling and taking their proceeds abroad without paying tax. At the time there was no way at the time for the IRS to collect tax from people who did not have a presence in the US other than the property they sold. FIRPTA changed this by putting the burden on the buyer (or other transferee) to withhold part of the proceeds of the sale (10% as to individuals) to put against any tax liability the foreign buyer may have. Typically it is the settlement officer / escrow agent who would bear this burden. The burden is even higher (35%) for a foreign corporation that sells a US property and then sends the proceeds to the corporation’s shareholders. Again, though, fortunately, going about both the buying and the selling the right way can reduce or even eliminate FIRPTA obligations.
Your United States Tax Return
I would be hard pressed to think of one of my foreign investor clients who wants to get into the messy business of filing a US tax return. There are options, however. Even if you have to file a US tax return that doesn’t mean that you have to do so individually, rather, there are corporate structures that allow you to limit what “you” have to report to the business of that entity. Second, in real estate it sometimes makes sense to consider yourself to be “effectively connected” to the United States and file a US return. These are just words that mean that in the eyes of the law you are, in summary, doing business here and agree to file a US tax return. The upside of this is that you are then able to fully deduct your expenses like property maintenance, interest expense, taxes and fees from your gross rents or spec properties.
Contact Us For Help
No matter what path you follow it is essential that you do it right the first time. This requires careful attention to all of the filing and election requirements. Failing to do this correctly could cost you some or all of your profits on the deal. I am here to help.
Ari Good, Esq.