Is there a “Best Way” for a Foreign Individual to Own U.S. Real Estate?
There are a number of ownership alternatives for foreign nationals to consider, each of which offers its own advantages and disadvantages. The following is a brief summary of the most common options, along with other items a foreign investor should consider when evaluating the most advantageous method for holding a U.S. property title.
Foreign individuals considering an investment in U.S. real estate should assess a number of important factors including risk, economic impacts, and the income tax consequences in both the United States and their own home country.
There are numerous options for structuring an investment in U.S. real estate. Determining the appropriate structure is very specific and depends on the goals, objectives and income tax situation of the particular foreign investor. With the help of Ron Klasko you, the foreign investor, will be able to choose the most appropriate alternative. As a foreign investor, you must also consider a variety of factors, including:
- The filing of personal annual income tax returns.
- The U.S. capital gain tax rate.
- U.S. estate tax.
- Administrative costs of multiple entities.
Any advice contained in this document (including any attachments unless expressly stated otherwise) is not intended or written to be used, and cannot be used, for purposes of legal advice or for the avoiding of tax penalties that may be imposed on any taxpayer. Please note that this summary was produced for the benefit of foreign individual investors and addresses important aspects of foreign investment in U.S. rental real estate. Comments and discussions are no substitute for specific tax advice and are primarily offered for discussion or illustrative purposes. People planning to invest in U.S. real estate should seek competent U.S. (See our Legal, Financial & Escrow Team) — and sometimes local foreign jurisdiction — legal and tax advice for their particular situation.
Below are the four most common ownership options for those acquiring U.S. real estate:
- 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.
- Investment in U.S. real estate via foreign corporation and U.S. corporation or LLC.
Direct Ownership by Foreign Individual
There are several U.S. tax considerations for a foreign investor who owns rental property in the United States:
- If the foreign owner uses that property for personal purposes for more than the greater of 14 days or 10 percent of the annual number of days rented (at fair rental value), the deductions allowed for income tax purposes are substantially limited1. When the owner of U.S. rental property (e.g., rental of vacation home) uses that property in excess of these prescribed limits, the general rule is that tax deductions to be claimed will be substantially limited — generally no more than the income from the property. In other words, the owner cannot write off tax losses for U.S. income tax purposes.
- 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. For 2010, the U.S. federal capital gains rate is 15 percent2. 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. Of course, in evaluating the U.S. taxes on capital gains, the foreign investor must also consider the impact of the income taxes in his or her home country.
- 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. In order to preserve any deductions for which the owner is entitled (including loss carry forwards), a U.S. income tax return filing is required each year. Alternatively, that individual could lose all deductions and be assessed income taxes based on the gross income received3.
- 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. residents4. In the case of a foreign decedent, all of the U.S. estate is subject to regular estate tax rates, less a credit of $13,0005.
Transfers of U.S.-owned real estate will frequently result in U.S. withholding tax on the transfer price. For additional and specific discussion regarding the Foreign Investment in Real Property Tax Act (FIRPTA) rules, advantages and disadvantages of any of the four aforementioned options we recommend contacting either your personal lawyer or accountant, or contact TripleNet Investors’s professionals.
2The U.S. tax rate on capital gains is expected to increase with a new tax bill after December 31, 2010. The future tax rate is uncertain at this time.
3IRC § 874 and Income Tax Reg. § 1.874-1
4At the time of this article, US Congress is debating a change (expected to be increased) in the schedule exemption amount of $1.5 million that is to be effective beginning January 1, 2011.
5Less applicable related foreign death taxes.
*Any changes to the Tax Code, opinions or statements made on this web site are not intended as legal or tax advice. Use of our professionals in these domains, is highly recommended. TripleNet Investors highly suggests that each investor seeks their own legal and financial counsel to suit their comfort level and specific needs.