Tax Planning for the Foreign Real Estate Investor - Tax Benefits and Tax Traps
By Richard S. Lehman & Associates, Attorneys at Law
The general principles discussed herein are not intended to be legal or tax advice and taxpayers should consult with their individual legal, accounting and tax advisors.
Table of Contents
I. TAXPAYER STATUS FOR U.S. INCOME TAX PURPOSES
* The Foreign Investor
* Nonresident Alien Individuals
* Foreign Corporations
II. TAXATION PATTERN
* U.S. Taxpayers
* Foreign Taxpayers
III. OWNERSHIP OF REAL PROPERTY
* Individual Ownership and Conduit Entities
* Corporate Ownership Both Foreign and U.S.
IV. TAX PLANNING BENEFITS AND TRAPS UNIQUE TO THE FOREIGN INVESTOR IN REAL ESTATE
* Tax Treaties
* A Single U.S. Tax
* Portfolio Interest
* Sale of Stock/Foreign Corporation
V. THE TAX PLANNING STRUCTURES
* Individual Ownership/Pass Through Entity
* Foreign Corporate Ownership
* Real Estate Holding Company
South Florida continues to be a destination for foreign investors (“Foreign Investors”), hoping to invest in United States real estate. Very often Foreign Investors are unfamiliar with the federal and state tax laws that they will face when investing in U.S. real estate. Often this lack of knowledge can be costly with Foreign Investors paying unnecessary taxes. The following is a checklist of issues that may be helpful to avoid tax problems.
I. TAXPAYER STATUS FOR U.S. INCOME TAX PURPOSES
* The Foreign Investor - A Nonresident Alien Individual or a Foreign Corporation
* Nonresident Alien Individual
- No Green Card - No Permanent Residency
- No Substantial Presence in the U.S.
- No Tax Treaty Benefit as to Residency
* The Foreign Corporation
The Foreign Investor
A Foreign Investor generally is defined as either an individual person who is a nonresident alien or a foreign corporation (or a foreign entity treated as a corporation under United States tax law).
Nonresident Alien Individuals
A nonresident alien individual will be any citizen of a country other than the United States who is not a “U.S. resident” for U.S. income tax purposes. An alien is not considered to be a U.S. resident for tax purposes if the alien does not have (1) a green card representing permanent residency or (2) a “substantial presence” in the U.S. as described below.
An alien individual has a “substantial presence” in the United States for the calendar year in which the alien is both physically present in the U.S. for at least 31 days and; in that same calendar year is considered to have been in the U.S. for a total of 183 days or more during the past three years.
For purposes of this 183-day requirement, each day present in the United States during the current “combined” calendar year counts as a full day, each day in the preceding year as one-third of a day and each day in the second preceding year as one-sixth of a day.
The United States has tax treaties with many countries. These treaties generally provide that the residents and corporations of each country to the treaty are entitled to a more liberal tax treatment than residents and corporations of non-treaty countries. The concept of residency under the treaties is different then the general definition and may permit a nonresident alien to spend more time in the U.S. each year without being a U.S. tax resident.
Foreign Corporation
A foreign corporation is a corporation that is not organized under the laws of the United States or any one of the states of the United States. A foreign corporation’s articles of incorporation will reflect whether it is a foreign corporation or a domestic corporation.
II. TAXATION PATTERN
U.S. Taxpayers
* U.S. Citizens, Resident Aliens and Domestic Corporations - Real Estate Income Subject to Taxation
- Income Taxation - Worldwide Income
- Estate and Gift Taxation (Individuals only) - Worldwide Assets
U.S. citizens, resident aliens and domestic corporations are subject to taxation on their worldwide income, including real estate income. United States citizens and resident aliens are also subject to a U.S. estate tax and gift tax on transfers of their worldwide assets, including real estate.
Foreign Taxpayers
* Nonresident Aliens and Foreign Corporations -Real Estate Income Subject to Taxation
- Income Taxation - United States Real Estate Income
- Generally taxed on net income similar to US Taxpayers
- Several Important Exceptions
* Capital Gains Taxation
- Alien Individual - Individual Tax Rates
- Foreign Corporation - Corporate Tax Rates
* Estate Taxation
- Alien Individual Residency for Estate Tax Purposes
- U.S. Real Property, U.S companies holding U.S. Real Property and the U.S. estate and gift taxes
* The Branch Tax (Foreign Corporation Only)
Income Tax
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