Best Structure for Non US Residents

I’m seeing tremendous interest from people outside the United States regarding how to safely invest here. With the depressed real estate prices here, it’s looking like a pretty good deal for many people outside the country. But that means they also need a crash course on how the US operates for banking, real estate investment, taxes, and business structures.

As a non-resident, your traditional choice has been a C Corporation. The reasoning behind that option is that C Corporations can have shareholders anywhere in the world, and because the C Corporation pays tax at its own rate and files its own tax return, it’s easier all the way round as far as non-residents are concerned.

The C Corporation is a great choice, but it’s not always the most tax-advantaged choice. For that reason, we usually suggest that our non-residents that they consider an LLC instead. Here’s how it works:

Holding Real Estate in a US Limited Liability Company (LLC)

A Limited Liability Company, or LLC, is a legal structure that provides asset protection and personal liability protection for its owners. It is available to use in all 50 states. When you hold assets in a US LLC, and the LLC is sued, your personal assets held outside of the LLC are not at risk.

LLCs are an important tool for non-US resident property owners. They are the best way to hold property and the easiest way to function within the US income tax system.

Ideally, your LLC will be set up in the state where the property you are purchasing is located. You may have heard that Nevada, Wyoming and Delaware are good places to set up LLCs as well. That is correct, but the truth is, your costs will probably be lower if you set your LLC up in the same state where you property is located. If you are buying properties in more than one state, you can register your LLC into a second state.

Taxation Information

You must pay US tax on your US-sourced income. You may also owe state tax in the state where your property is located.

There are two choices you can make with tax. With the simple method, it’s … simple. You (or your US property manager, in most cases) are required to withhold 30% of the LLC’s profits and send that money to the IRS. The remainder of the money is yours to take home and declare in your home country. You don’t file a tax return in the US. When you sell the property, another 10% of the sale price is withheld for tax.

The second way isn’t quite as simple, but it does allow you to reduce that 30% withholding rate to just 10%. The trade-off here is that you will have to file a US tax return, declaring your US-sourced income, and paying US tax on it. However, with all of the deductions available to you, there may be little or no US taxable income.

As part of the LLC creation process, you need to tell the IRS how the structure will be taxed. If you own the LLC by yourself or with your spouse, it’s probably best to make a ‘disregarded’ tax classification election with the IRS. The LLC will still give you all of the same legal protection personally, but it will be transparent to the IRS for taxes. That means you will file a personal non-resident tax return with the IRS each year, along with a state tax return, if you buy property in a state that has an income tax (most states do have an income tax).

The tax form is called an IRS Form 1040NR. Because your LLC will earn passive income, the Form 1040NR is due on June 15th each year. However, before you can file that form, you must apply for and receive an International Taxpayer Identification number (an “ITIN”). If you are married, your spouse will also need to apply for an ITIN.

If you own the LLC with another, unrelated person, you will need to make a ‘partnership’ election with the IRS. A partnership must file a separate tax return IN ADDITION to the IRS Form 1040NR you must file personally. Each individual owner of the LLC will also need to get his or her own ITIN separately.

When your first tax return is filed, the rental income generated by the real estate property will be characterized as ‘Effectively Connected Income’ (ECI) in the United States. It will be taxed at the same rates available to US residents. The lowest tax bracket is currently 10%. There are many tax deductions available to real estate owners, which could significantly lower the amount of reportable, taxable income you will pay. There is a special tax election you must make to get this preferential tax treatment. It may ONLY be made with your FIRST tax return.

When you sell the property in the future, any profit will be calculated in accordance with the US Foreign Investment in Real Estate Property Act (“FIRPTA”). The purchaser must withhold 10% of the fair market value of the property to partially cover your federal gain tax that will be payable on the sale. You may be able to offset the gain tax paid against the tax that will be payable in your home country.

We work with non-resident investors from several countries. If you’re interested in learning more, or working with us, we’d be happy to help!

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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