The first thing you have to understand is that when buying real estate in the U.S. as a foreigner there are no perfect options. There are three most common ownership options for those acquiring U.S. real estate (one of which is particularly interesting), but each option has its advantages but also its drawbacks. This is the message I?m trying to convey on my blog. Offshore structures are useful and correctly used they can offer many advantages to their advantages but none of them are perfect as there are always drawbacks. Do not hesitate to contact me for more information on this matter at corporate@offshorepremium.com
The three options you may use as a foreigner to purchase real estate in the USA are as follows:
- Direct ownership by foreign individual
- Investment in U.S. real estate via U.S LLC (limited liability company)
- Investment in U.S. real estate via foreign corporation
First Option: Direct Ownership by Foreign Individual
Major benefits of the first option
One of the major benefits gained from owning the real estate directly: the foreign person is generally entitled to the more favorable U.S. federal capital gains tax rates at the time of sale. Depending on the length of time the property is held, a portion of the capital gain may be taxed at a higher rate in connection with gains realized that are related to depreciation deductions. Each U.S. state will impose its own rates on capital gains.
Warning: When you evaluate the U.S. taxes on capital gains, please also consider the impact of the income taxes in your home country in case of resale of the property
?Major Drawbacks of foreign individual ownership
- The foreign individual will be required to file U.S. federal and state individual income tax returns for each year of ownership, whether or not he actually has an income tax liability. A U.S. income tax return filing is required each year in order to preserve any deductions for which the owner is entitled (including loss carry forwards).
- Direct ownership of U.S. real estate generally results in that property being reportable and taxable for U.S. estate tax purposes.
- Furthermore, a foreign individual is not eligible for the more generous estate tax filing exemptions available to U.S. residents. In general, the foreign person?s exempt amount is significantly lower than what is permitted for U.S. residents.
- Transfers of U.S.-owned real estate will frequently result in U.S. withholding tax on the transfer price. (Foreign Investment in Real Property Tax Act (FIRPTA) rules.)
?Second Option: Investment in U.S. real estate via U.S LLC
Most of the issues associated with direct ownership also apply when a foreign individual owns U.S. real estate through a U.S. LLC. Following are some of the issues to consider:
Advantage
At the end of the day there is only one advantage for a foreigner to purchase real estate in the US through a U.S. LLC. It gives the individual ?limited liability? on the same general basis as a corporation.
Drawbacks
Most of the issues associated with direct ownership also apply when a foreign individual owns U.S. real estate through a U.S. LLC. Following are some additional issues to consider.
- Both the individual and the U.S. LLC must file annual U.S. income tax return.
- The U.S. income tax treatment of a U.S. LLC is as a partnership (if there is more than one owner) or disregarded entity (if there is only one owner). The foreign individual?s home country income tax treatment of the U.S. LLC, however, varies from country to country. Many foreign countries treat the U.S. LLC as a corporation, which often results in a mismatch of income taxation between that foreign country and the United States in any given year.
- The same U.S. income tax reporting and U.S. estate tax issues apply to the individual investor.
- A transfer of the ownership interest in the U.S. LLC will result in the same U.S. withholding tax under U.S. FIRPTA rules as a transfer of a direct interest
In some way for a foreign individual to use a U.S. LLC to purchase real estate in the U.S. is even worth than to purchase it as an individual
Third Option: Investment in U.S. real estate via foreign corporation
Advantages
- The foreign individual that owns the foreign corporation does not need to file annual file annual U.S. income tax return. In this case, the U.S. income tax filing responsibilities fall to the foreign corporate entity only.
- The foreign corporation masks the owner. In other words no risk of becoming personally liable to the IRS
- The foreign corporation will prevent the foreign individual from being liable for the U.S. estate tax (one of the principal advantages).
- The foreign corporation provides the owner with limited liability (another significant advantage).
?Drawbacks
Two of the drawbacks mentioned above in option 1 and 2 cannot be avoided that is to say:
- A sale of the foreign corporation?s shares will generally be taxable in the United States due to its classification as a U.S. Real Property Holding Company (USRPHC). A sale of shares in a USRPHC will also be subject to U.S. withholding tax.
- The foreign corporation will not be entitled to the favorable U.S. capital gain rates offered to a foreign individual in option 1.
Overall purchasing through a foreign corporation has more advantages and fewer drawbacks than the two other options mentioned above.
Do not hesitate to contact me for more information on this matter at?corporate@offshorepremium.com
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