The Best Structure for Foreign Investors

Are you a non-resident, looking to invest in real estate in the United States? There are some fantastic opportunities, plus some tax traps for the unwary. Before you spend thousands on purchasing US-based real estate, spend some time planning how you’ll deal with the various taxes and other legal issues.

Business Structures

In most cases, a US LLC is a solid choice for non-resident investors, especially if it’s just you, or you and your spouse, holding the real estate. The US LLC will give you legal protection here, plus a helpful “in” into the US tax system.

If you’re looking at buying a lot of properties, I’d also recommend that you consider a Series LLC. This is a special type of LLC that lets you create an unlimited number of sub-LLCs, called Cells. The Cells can be used to hold different pieces of real estate, and as long as you follow the corporate rules on record-keeping, you should also get asset protection between the Cells. In practical terms, that means a problem with a property titled in Cell A won’t impact properties in Cells B, C, D and the Parent LLC.

But sometimes an LLC is a bad choice. For example, an LLC is probably the worst structure for Canadians. In the US, LLCs can pick their tax classification. Most often, for single owner LLCs, or LLCs owned by a husband-wife team, LLCs are taxed as ‘sole proprietorships,’ or ‘disregarded,’ which is a fancy way of saying that the income you earn is taxed the same way it would be if you owned the property directly in your name. However, Canadian tax law doesn’t see LLCs the same way – they treat LLC earnings like they do Canadian corporation earnings. That can lead to a much higher tax bill than you anticipated. So, before you push the button on a US LLC, have a conversation with your local tax advisor to make sure the US LLC won’t be treated badly when you get that income home.

Taxation Issues

As a foreign investor, your biggest issue is taxes. How will the income from your real estate be taxed? How will the income from a real estate sale be taxed? What are the implications to your Estate?

If you’re a single owner, or it’s you and your spouse, then we often suggest that you register here to file US taxes. Otherwise, you face the prospect of losing a flat 30% of your LLC’s income to a mandatory withholding tax. But if you come into the US system voluntarily, there are ways to reduce that 30% down considerably – may be even to 10% or so.

If you have a lot of owners, maybe you’re part of an investing group, then it may be simpler in the long run to set up a company in your home country and have that company own the US LLC instead. Otherwise, you’ve got to do separate tax filings for each individual owner, and that can get expensive, fast.

When a property is sold, you have capital gain issues to consider, along with another mandatory withholding of 10%, under something called FIRPTA (Foreign Investment in Real Estate Property Act). However, if you make a special tax election you may be able to have the FIRPTA withholding requirement removed.

Where estate planning is concerned, the answer depends on where you live, and how you chose to hold your US property. Normally, the first $60,000 in value on your US assets is exempt from US estate tax. So if you owned real estate worth $80,000 in the US, your estate would only be taxed on $20,000. But if you live in a country that has a tax treaty with the US, then your exemption could be considerably higher. For example, you may be able to declare your worldwide estate in the US and then take the higher US exemption, which is currently $5m. So if your worldwide estate was worth USD $5 million, you could declare everything, and not have to pay any US estate taxes. But if your worldwide estate was a lot higher than that, you’d probably want to just declare your US assets and go back to the $60,000 exemption.

Also, if you have your US LLC held by a foreign company, you may also be able to avoid US estate taxes, simply because your estate is considered to be the owner of the foreign company. You don’t own the US company or the US property directly, so it doesn’t create a US tax filing obligation for you.

Plan Carefully

There is a lot of opportunity in the US market, but if you come in without planning, you will pay more in taxes than you need to. We work with investors from around the world, and have a lot of resources to help you make the right choices, based on your own circumstances. We can also help you with your entity formation, tax filings, and registration into the US tax system. Please contact us to learn more.

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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