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Tax Challenges for Foreign Investors in U.S. Real Estate Navigating the Legal Considerations of Acquiring, Owning and Disposing of U.S. Real Estate

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, MAY 29, 2014

Presenting a live 90-minute teleconference with interactive Q&A

Ruben Flores, Jr., President, Flores Group, San Antonio

Joshua A. Kaplan, Partner, Bilzin Sumberg, Miami

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OVERVIEW OF FOREIGN INVESTMENT IN U.S. REAL ESTATE

Ruben Flores, CPA & ATTORNEY THE FLORES GROUP

Corporate • Tax • Business Advisors [email protected]

San Antonio Office: Houston/Woodlands Office: 7272 Wurzbach Rd. Suite 901 2002 Timerbloch Place, Suite 200 San Antonio, TX 78240 The Woodlands, TX 77380 (210) 340-3800 (281) 292-0044

5 Copyright © 2014 by The Flores Group

TRENDS IN FOREIGN INVESTMENT

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U.S.A. has seen a dramatic increase in foreign investment because of various factors: • Good investment opportunity

• Rising crime and violence in some foreign countries

• Better educational and economic opportunities for the

family • Business relocation and domiciliation

Copyright © 2014 by The Flores Group

7

According to the U.S. Bureau of Economic Analysis, Foreign

Direct Investments into the U.S. were: • 2010 - $206 Billion • 2011 - $230 Billion • 2012 - $166 Billion • 2013 - $234 Billion

In 2013, more foreign direct investment dollars flowed to the U.S. than

to any other single country in the world.

FOREIGN INVESTMENTS IN THE UNITED STATES


TOP GLOBAL CITIES

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1. New York (#1 last year) 2. London ( #2 last year) 3. San Francisco (#3 last year) 4. Houston (#5 last year) 5. Los Angeles (#14 last year) * According to survey of member of the Association of Foreign Investors in Real Estate (AFIRE)


MOST STABLE AND SECURE COUNTRIES FOR FOREIGN INVESTMENT

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1. United States (#1 last year) 2. Germany (#3 last year) 3. United Kingdom (# 5 last year) 4. Canada (#2 last year) 5. Australia (# 4 last year) * According to survey of member of the Association of Foreign Investors in Real Estate (AFIRE)


COUNTRIES PROVIDING THE BEST OPPORTUNITY FOR CAPITAL APPRECIATION

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1. United States (#1 last year) 2. China (#3 last year) 3. Spain (#5 last year, tied with Australia and Mexico) 4. Australia tied with Mexico (last year, Australia and

Mexico were tied for # 5 along with Indonesia) 5. United Kingdom (unranked last year)


TOP FIVE U.S. CITIES

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1. New York (#1 last year) 2. San Francisco (#2 last year) 3. Washington, D.C. (#3 last year) 4. Houston (#4 last year) 5. Los Angeles (#6 last year) * According to survey of member of the Association of Foreign Investors in Real Estate (AFIRE)


TOP FIVE U.S. PROPERTY TYPES

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1. Industrial (#2 last year) 2. Office (#4 last year) 3. Retail (#3 last year) 4. Multi- family (#1 last year) 5. Hotel (#5 last year) * According to survey of member of the Association of Foreign Investors in Real Estate (AFIRE)


CRITICAL ISSUES FOR THE FOREIGN PERSONS

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• Best financial and business opportunities in U.S. real estate

• Legal and tax implications of investing in U.S. real estate

• U.S. immigration status and options

• U.S. tax status and obligations

• Best legal forms for a foreign person to invest in U.S. real estate

Copyright © 2014 by The Flores Group 13

CONCLUSION

• Foreign investment in U.S. real estate will continue despite the legal and tax

complexities, that await foreign investors because of:

1. Stable market

2. Potential capital appreciation

3. Proximity to consumer markets

4. Political stability

5. Instability of foreign markets

Copyright © 2014 by The Flores Group 14

INCOME TAX CHALLENGES FOR THE FOREIGN INVESTOR IN U.S. REAL ESTATE





INCOME TAX CHALLENGES FOR THE FOREIGN INVESTOR

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• A foreign investor in U.S. real estate has many challenges to overcome to achieve successful returns and investment in U.S. real estate. Besides the market and financial challenges, he/she must determine the tax challenges that must be considered in their planning and structuring of their investments and operations in the U.S.



17

• Some of the specific challenges and issues that a foreign investor should consider are: 1. How can a foreign investor avoid classification as a U.S. resident for both

income tax and estate tax purposes? 2. How will the immigration status and/or physical presence of the foreign

investor in the U.S. affect his/her tax obligations? 3. Should the foreign person invest as an individual, U.S. corporation, or

foreign corporation? 4. When will the foreign investor be subject to FIRPTA, and how can they

avoid it? 5. When will rental income be considered passive income subject to

withholding or business income subject to taxation on a net basis?


TAXATION OF FOREIGN INVESTORS IN U.S. REAL ESTATE

18

• The first determination that a foreign investor in real estate must make is whether the investor is considered a U.S. person for U.S. income tax purposes, because : 1. U.S. persons are subject to worldwide taxation, IRC §61(a) 2. Foreign persons are subject to taxation of U.S. source

income. IRC §871(b) & 882(a)


DEFINITION OF U.S. PERSONS IRC SEC. 7701(a)(30)

19

• Definition of U.S. persons: 1. U.S. citizens- Born or naturalized in the U.S. 2. Resident Aliens- Green card test and substantial presence test 3. Domestic corporations- Corporations created or organized in the U.S. 4. Domestic Partnerships- Partnerships created or organized in the U.S. 5. Domestic Estates- Any Estate if subject to U.S. taxation of worldwide

income 6. Domestic Trust – Any trust if U.S. tax court has jurisdiction over the

administration and one or more U.S. persons have authority to control all substantial decisions of the trust

• If a foreign investor is classified as a U.S. person then he/she will be taxed on worldwide income not just U.S. source income.


DEFINITION OF RESIDENT ALIEN IRC SEC. 7701(b)(1)(A)

20

• Foreign investors in U.S. real estate must carefully monitor their presence in the U.S. and carefully make any immigration decisions because of the income tax implications

• The U.S. taxes foreign individuals (aliens)based on their residency status:

1. Residents taxed on worldwide income 2. Non- residents taxed on U.S. source income

• A foreign individual is considered a U.S. resident for tax purposes in any calendar year that he/she meets either the:

1. Green card test 2. Substantial presence test


RESIDENCY TEST & ISSUES

21

• Some foreign investors with substantial U.S. real estate

investments or business may consider changing their immigration status to better oversee and manage their investments, or may find themselves spending substantial amount of time in the U.S. The foreign investors should determine if they satisfy either of the two tests for residency:

1. Green card Test 2. Substantial presence test


22

• Green Card Test- An alien individual is treated as a U.S. resident

for a calendar year if, at any time doing the calendar year, the

individual is a lawful permanent resident of the U.S. (IRC §7701

(b)(1)(a)(i))

1. Based on the legal privilege of residing in the U.S. 2. Considered U.S. residents for tax purposes, regardless of

whether they are actually physically present in the U.S. 3. The residency starting date is the first day the tax payer is

present in the U.S. with a green card


RESIDENCY TESTS

RESIDENCY TESTS

23

• Substantial Presence Test- A foreign individual who does not have a green

card, but is physically present for 183 days or more in the U.S. is considered a

U.S. resident for tax purposes. (IRC §7701(b)(3))

1. Days present in the U.S. are determined over a three year period based on different ratios/percentages for each year. (100% current year + 1/3 First preceding year + 1/6 second preceding year)

2. A day is counted if the foreign individual is/was physically present during any part of the day.

3. The individual must be present in the U.S. at least 31 days during the current calendar year to be considered a resident for that year.

4. If residency is established under substantial presence test then residency begins the first day physically present in the U.S.


EXCEPTIONS & DEFENSES TO RESIDENCY CLASSIFICATION

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• If the foreign Real Estate investor finds that he/she has spent a substantial amount of time in the U.S. and wants to avoid classification as a U.S. resident for tax purposes, there are two options

1. Closer Connection Exception 2. Treaty Exceptions



25

• Closer connection exception (IRC §7701(b)(3)(B)) provides that an

individual that meets the substantial presence test will not be considered a U.S. resident for tax purpose if:

1. The individual is present in the U.S. for less than 183 days during current year

2. The individual has a tax home for the current year in a foreign county

3. The individual has a closer connection to that foreign county (based on facts and circumstances)

4. This exception does not apply if the alien has applied for a green card.



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• The Closer Connection Exception is made on form 8840 and filed with the individuals personal tax return.



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• Treaty Exception – The U.S. has tax treaties with several

countries that allow foreign people to avoid classification as U.S. residents for tax purposes, if they satisfy treaty tie-broker provisions. The U.S. Model Income Tax Convention, Article 4 provides four factors to determine residency:

1. Location of permanent home available 2. Location of center of vital interests 3. Location of habitual abode 4. Nationality of the person

• The treaty exception is filed on Form 8833 and filed with

the personal tax return. Copyright © 2014 by The Flores Group

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• The foreign investor should be aware that income from the sale of rentals of U.S. real property is considered U.S. source income and subject to taxation, regardless of the residency of the foreign investor:

1. Rental Income has its source where property is located or used (IRC § 861 (a)(4) & ( IRC § 862 (a) (4))

2. Real Property gains has its source where the property is located. (IRC § 861(a)(5) & IRC § 862 (a)(8))


SOURCING RULES FOR U.S. REAL PROPERTY

SOURCING RULES FOR U.S. REAL PROPERTY

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• However, for compensation, interest, and other types of income, the source rules are based on where the services are provided or the location of the person/company/ debtor. These provisions should be considered carefully in structuring the financing, management, and ownership of the investment:

1. Compensations/ management fees – sourced at the place the services are provided

2. Interest – Sourced at the location of the debtor 3. Dividends – Sourced at the place of the incorporation


30

• A foreign investor in real estate may want to consider using a corporation or partnership to invest in U.S. real estate- the question is whether it should be a domestic or a foreign entity.

1. A U.S. Corporation or Partnership is any corporation or partnership organized in the U.S., and is taxed on worldwide income. (IRC §7701(a)(4))

2. A foreign corporation or partnership is any corporation or partnership organized in a foreign jurisdiction, and is taxed on U.S. source income (IRS §7701(a)(5))


TAXATION OF DOMESTIC CORPORATION & FOREIGN CORPORATION


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• The advantages and disadvantages of using a U.S. corporation to invest in Real Estate are:

+ Asset Protection + U.S. Corporation not object to FIRPTA rules + Easier for estate and gift tax planning - No capital gains rate - Foreign shareholders subject to FIRPTA - Individual shareholders subject to estate tax


32

• The advantages and disadvantages of using a foreign

corporation are:

+ Asset protection + Foreign shareholders not subject to FIRPTA + Foreign shareholders not subject to estate tax on shares in foreign corporation - No capital gains rate - Branch profits tax may apply - Foreign corporation subject to FIRPTA



33

• The advantages and disadvantages of using a domestic partnership are:

+ Asset protection for limited partners + Ability to joint venture with others + No gift tax transfer of partnership interest - Partnership will have to withhold on partner’s share of ECI (IRC §1446(a)) - FIRPTA applies to sale of property or partner’s interest - Individual partners subject to estate tax on their partnership interest


TAXATION OF DOMESTIC PARTNERSHIP & FOREIGN PARTNERSHIP

TAXATION OF DOMESTIC PARTNERSHIP & FOREIGN PARTNERSHIP

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• The advantages and disadvantages of using a foreign partnership are:

+ Asset protection for limited partners + Ability to joint venture with limited partners + No gift tax on transfer of partnership interest + No tax returns required if no ECI or FDAP - Partnership will have to withhold on partner’s share of ECI (IRC §1446(a)) - FIRPTA applies to sale of property or partner’s interest - Individual partners subject to estate tax on their share of underlying U.S. property.



35

• A foreign investor in U.S. real property has some specific

tax provisions to consider that may affect the way that he/she structures and operates his/her investments:

1. FIRPTA: U.S. Person vs. Foreign Person 2. Long Term Capital Gains Rate: Individual vs. Corporation 3. Rental Income: Gross Basis Taxation vs. Net Basis

Taxation 4. Estate Tax: Individual vs. Foreign Corporation


LONG TERM CAPITAL GAINS FROM SALES OF REAL PROPERTY

36

• Long term capital gains of individual investors taxed at

favorable rate of 20%, where as corporations it is taxed at the regular tax rates with a maximum tax of 34%.

• Options and decisions for the Foreign Person: 1. Invest as a foreign individual to get favorable long term

capital, but subject to estate tax 2. Invest as a U.S. corporation to avoid FIRPTA and lose the

favorable LTCG rate. 3. Invest as a foreign corporation to avoid the estate tax , and

be subject to FIRTPA, regular tax rates, and the branch profits tax.


RENTAL ACTIVITIES OF FOREIGN PERSONS

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• Rental Income and activities of U.S. persons is taxed on a

net basis, i.e., rental income less rental expenses, where as a foreign person is taxed on a gross basis, unless a proper election is made to treat the rental activity as a U.S. trade or business. (IRC§ 871(a)(l)(A), IRS §881(a)(i))

1. Withholdings of 30% of gross rents required 2. Election to treat rental income as effectively connected to

a U.S. trade or business is made on statement attached to the tax return. (IRC § 871(d))


CHALLENGES AND DECISIONS FOR FOREIGN PERSON:

38

• Challenges & Decisions for Rental Property:

1. Invest and operate as a foreign person subject to 30% withholding on gross rents.

2. Elect to treat the rental income as ECI, taxed on a not basis

3. Use a U.S. corporation to invest in rent property, taxed on a net basis


CONCLUSION

39

• The foreign investor will find that there is no easy and ideal

structure for investing in U.S. real estate. The foreign investor should determine their short and long term goals, evaluation the purpose of the investment, and try to quantify the costs and benefits of each structure

• Finally, the foreign investor must seek professional legal and tax advice on these matters in both the U.S. and their home country to determine their obligations.


Slide Intentionally Left Blank

• Click to edit Master text styles • Second level • Third level • Fourth level • Fifth level

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Tax Challenges for Foreign Investors in U.S. Real Estate

www.bilzin.com

41

Joshua A. Kaplan Bilzin Sumberg

1450 Brickell Avenue, 23rd Floor Miami, FL 33131

[email protected]


42

Taxation of Non-US Persons

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US Taxation of Non-US Persons • Taxed only on U.S. source income and income

effectively connected with conduct of a U.S. trade or business (ECI)

– U.S. source income is taxed on a gross basis by withholding at source at rate of 30% (subject to lower treaty rate) (i.e., interest, dividends, rents, royalties and other FDAP).

– Effectively connected income is taxed on a net basis at graduated rates of up to 39.6%

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US Source Income • U.S. source income subject to gross 30%

withholding includes U.S. dividends, interest, rents, royalties and salaries

– Broad exceptions exist for U.S. source interest: portfolio interest, bank deposit interest, short-term debt obligations (i.e., 183 days or less)

– Capital gain on U.S. assets (except U.S. real property interests) is not subject to income tax unless gain is ECI or non-U.S. person has “substantial presence” in US

44


45

Portfolio Interest Exception • Requirements

– Statement that beneficial owner is not a US person (IRS Form W-8)

– Registered Form (book-entry system) • Limitations

– Non-US person cannot own 10% or more of the voting power of the issuer

– Interest received by controlled foreign corporation from a 10% US shareholder

– Contingent Interest not eligible

45


46

Dividends • Generally subject to 30% withholding tax

(subject to reduced treaty rate) • Exception for liquidating distributions

– Liquidating distributions treated as received in exchange for stock (i.e., as capital gains)

46


47

Effectively Connected Income • Subject to net income tax as similarly

situated US person – Tax return filing requirement – 30% branch profits tax for corporations

(subject to reduced treaty rate) – Treaty – US permanent establishment

requirement

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48

Income Tax Treaties • Portfolio Income

– Withholding rate may be reduced by an income tax treaty

• Effectively Connected Income – Generally requires permanent establishment

in US in order to be taxed in US • Limitations

– Limitation of Benefits clause minimizes treaty shopping

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Basic FIRPTA Rules

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Investing in US Real Estate (FIRPTA) • Foreign Investment in Real Property Tax Act of 1980

(FIRPTA) • Applies to "dispositions" of "United States real property

interests" (USRPIs) by a nonresident alien individual or a foreign corporation.

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51

Basic FIRPTA Concepts • Gain from disposition of a USRPI is treated as "effectively

connected income" subject to regular net income tax – Gains can qualify for long-term capital gains rates – Foreign corporations may also be subject to a 30% branch profits tax

• FIRPTA tax liability is generally enforced through withholding obligations imposed on purchaser/transferee

• Foreign sellers are required to file U.S. income tax returns and are

taxed on gains at the same rates applicable to U.S. sellers • Nonrecognition provisions (e.g., a 1031 like kind exchange)

generally do not apply unless seller receives U.S. property in the exchange that would be subject to tax on a subsequent disposition and satisfies certain procedural requirements.

51


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United States Real Property Interests - Direct Interests • USRPI is defined as an interest in real property

(located in the US or the US Virgin Islands), other than an interest solely as a creditor

– Land, buildings and other improvements on the land – Growing crops and timber, and mines, wells and other

natural deposits that have not been severed or extracted – Certain "associated personal property" – Leasehold interests – Options to acquire land or improvements thereon – Any direct or indirect right to share in the appreciation in

the value of, or in the gross or net proceeds or profits from the real property (e.g., shared appreciation loans)

52


53

United States Real Property Interests - Indirect Interests • USRPI also includes certain indirect interests

– Interest in a US real property holding corporation (USRPHC)

• USRPHC defined as a domestic corporation where the fair market value of its USRPIs equals or exceeds 50% of the sum of its (i) USRPIs, (ii) non-US real property interests and (iii) other non-real property trade or business assets.

• Look through for interests in partnerships and stock of controlled subsidiaries

– Interest in a partnership to the extent gain on the disposition of a partnership interest is attributable to USRPI held by the partnership

53


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United States Real Property Interests - Exclusions • USRPI does not include:

– An interest solely as a creditor, which includes a mortgage loan at a fixed rate of interest (or a variable rate such as prime, LIBOR, etc.), so long as

• Not convertible into an equity interest in a USRPI; • Interest on the debt is not linked to the performance of USRPI; and • No equity kicker or other participation in profits of USRPI.

– Interest in a domestically controlled REIT – Interest in a corporation that has disposed of all USRPIs in

fully taxable transactions – Interests in publicly-traded corporations where the taxpayer

owned less than 5% of the stock during the preceding 5 years

54


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Dispositions of USRPIs • FIRPTA only applies to a "disposition" of a USRPI • “Disposition” is not defined in the statute but has been broadly

interpreted to include the following:

– Sales and exchanges – Capital contributions (to corporations or partnerships) – Distributions (by a corporation or a partnership) – Transfers in connection with corporate mergers – Gifts (where the transferred property is subject to liabilities in excess

of its adjusted basis)

55


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Nonrecognition • FIRPTA generally applies to dispositions where a

nonrecognition provision applies, unless

– Transferor receives a USRPI in exchange for the transferred USRPI

– Immediately following the exchange, the USRPI received in the exchange would be subject to US tax upon its disposition; and

– Foreign transferor complies with certain IRS filing requirements

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FIRPTA Withholding • FIRPTA requires a transferee to withhold 10% of the gross

"amount realized" from the sale or exchange of USRPI by a nonresident

– Amount realized equals sum of cash received and fair market value of other property received, plus the outstanding amount of liability assumed by the transferee to which the USRPI is subject

– Withholding certificate to avoid excess withholding (IRS Form 8288-B and Rev. Proc. 2000-35)

• Exemptions from Withholding

– Non-foreign status – Transferred interest not a USRPI

• Non-USRPHC status • Partnership does not meet the 50/90 test

– Sales price <$300,000 on property buyer will use for personal residence – Publicly traded stock – Non-recognition transfers – Withholding certificate

57


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FIRPTA Withholding (cont'd) • US partnerships, trusts and estates required to withhold tax

(generally at 35%) on gain realized from disposition of USRPI to the extent such gain is allocable to:

– a foreign partner/beneficiary of the partnership, trust or estate; or – a foreign owner of the trust under the grantor trust rules.

• Foreign corporations generally must withhold 35% tax on the

amount of gain recognized on the distribution of a USRPI

• USRPHC must withhold 10% tax on the fair market value of property distributed in redemption or liquidation to a foreign shareholder

• REITS generally must withhold tax (generally at 35%) on distributions to foreign shareholders of gain from sale or exchange of USRPIs

58


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FIRPTA Withholding (cont'd) • An interest in a partnership that owns USRPIs is

generally not considered to be a USRPI, except to the extent that the gain on a disposition of the interest in the partnership is attributable to a USRPI held by the partnership

• Purchaser or transferee of a partnership interest is required to withhold 10% of the amount realized on the transfer if:

– 50% or more of the value of the partnership's gross assets are USRPIs; and

– 90% or more of the value of the partnership's gross assets are USRPIs and cash or cash equivalents.

• REITS generally must withhold 35% tax on distributions to foreign

shareholders of gain from sale or exchange of USRPIs

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ESTATE TAX CHALLENGES FOR FOREIGN INVESTORS IN U.S. REAL ESTATE





ESTATE & GIFT TAX CHALLENGES FOR FOREIGN INVESTORS

62

• The foreign investor in U.S. real estate needs to carefully consider the U.S. estate tax on their U.S. investments. For many foreign investors this is a surprising factor to deal with because many countries do not have an estate or gift tax and its difficult to understand and accept.



63

• The estate tax is imposed on individuals, both U.S.

residents and Non- Residents:

1) U.S. residents subject to estate taxation on their worldwide estate (IRC §2001(a))

2) Non- residents subject to estate taxation on property located in the U.S. (IRC §2101 & §2106)



64

• The gift tax is imposed on both U.S. residents and Non-residents, (IRC §2501):

1) U.S. residents subject to gift tax on all gifts they

make, regardless of location. 2) Non- residents are taxed only on gifts of:

A. U.S. situs tangible property B. U.S. situs real estate

Note: Gifts of intangibles not subject to gift tax, may include gifts of corporate stock and partnership interest.


RESIDENCY FOR ESTATE & GIFT TAX PURPOSES

65

• A Foreign investor needs to carefully consider and manage

their immigration status and activities in the U.S. to avoid being classified resident for estate/gift tax purpose

• A resident for estate/gift tax purposes is defined differently than for income tax purposes: 1) Estate Tax Resident – A person who is “domiciled” in the

U.S. at the of death or time of gift 2) Domicile test is a subjective test based on intent of the

foreign person


DETERMINING RESIDENCY FOR ESTATE/GIFT TAX PURPOSES

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• The foreign investor must carefully plan and manage their

business, family, and activities in the U.S. if they wish to avoid classification as a resident for estate/ gift tax purpose

• The Internal Revenue Code provides that a foreign individual is deemed to be a resident for estate tax purpose if he/she has the intent to remain indefinitely in the U.S.

• The Internal Revenue Code and regulations do not provide much guidance as to what constitutes a subjective intent to remain indefinitely the U.S. (Treas. Reg. 25.2501-1(b))


DETERMINING RESIDENCY FOR ESTATE/GIFT TAX PURPOSES

67

• The courts have developed several factors, which can be used to

determine if a foreign individual has a subjective intent to remain indefinitely in the U.S., there are two classes of factors: 1) Personal Interest Factors – Location of the family, place where

children attend school, place of social and religious activities. 2) Business Interest Factors – Location of employment, place of

management of business, rate of investments between U.S. and foreign countries.

• Many foreign countries do not use the personal interest factors to determine intent or residency, which makes it more difficult for foreign investors.


DETERMINING THE TAXABLE ESTATE

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• Foreign investors need to know they may be subject to the estate tax, even if they are not residents of the U.S.

• If a non-resident individual dies with property located in the U.S. he/she will be subject to U.S. tax on such property (Treas.Reg.20.2104-1(a):

1) U.S. real property 2) Tangible personal property located in the U.S. 3) Stock in U.S. corporations (Not foreign corporations) 4) Debt obligations of U.S. persons, unless portfolio exception

applies


DETERMINING THE TAXABLE ESTATE

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• The foreign individual also has some exemptions and deductions from the estate to determine the taxable estate:

1) Expenses, taxes, and losses attributable to the gross estate (IRC §

2053&2054) 2) Non- recourse debt on U.S. property is netted to determine the net

value 3) Estate tax exemption of $ 60,000 4) Unlimited marital deduction if property left to U.S. citizen spouse

(IRC §2056) 5) QDOT may be used to transfer property to Non- US citizen

spouse, it defers the tax. (IRC §2056A)


OPTIONS FOR INVESTING IN U.S. REAL ESTATE

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• A foreign investor should carefully plan and structure their investments in the U.S., and determine which is the best legal/corporate form of ownership:

1) Invest as an individual directly in U.S. real estate, subject

to estate/ gift tax 2) Invest as an individual in a U.S. corporation that invests in

U.S. real estate , U.S. stock subject to estate tax. 3) Invest in a foreign corporation that invests in U.S. real

estate, foreign stock not subject to estate /gift


PERSONS SUBJECT TO U.S. GIFT & ESTATE TAX

71

US. CITIZENS IRC §2001(a)

U.S. RESIDENTS IRC §2001(a)

PERSONS SUBJECT TO U.S. GIFT & ESTATE TAX

All persons or naturalized and subject

to the jurisdiction of U.S. INA §301(a)-(h)

NON-RESIDENTS IRC §2001(a)

Persons who have their domicile in the U.S. with

the intent to remain indefinitely. Treas. Reg.§25-2501(b)

Persons without the

requisite intent to remain indefinitely in the U.S. even

if they have a U.S. residence. Treas. Reg.

§25.2501-1(b)


PROPERTY SUBJECT TO U.S.& ESTATE TAX

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US. CITIZENS & RESIDENTS IRC §2103

Determining the Gross Estate for U.S. Tax Purpose

Taxable estate includes all property wherever

situated, i.e. worldwide basis, regardless if real,

personal, tangible or intangible. Treas. Reg.

§20.2031-1(a)

NON-RESIDENT ALIENS

IRC §2003 & 2104

Taxable estate includes only that portion which is

situated in the U.S. Treas. Reg. §20.2104-1(a)


PROPERTY OF NRA SUBJECT TO GIFT TAX

73

Real property situated in the U.S. Treas. Reg. §25.2511-3(a)

Property of NRA subject to U.S. Gift Tax IRC §2501

Tangible personal property physically situated in the U.S. at the

time of gift (does not include intangible property) Treas. Reg.

§25.2511-3(a)


INVESTMENTS OF NRA

74

Stock in Foreign Corporation

1. Foreign situs property

2. Not included in U.S. taxable estate

(Treas. Reg. 20.2104-1(a))

Stock in U.S. Corporation

1. U.S. situs property 2. Included in U.S.

taxable estate (Treas. Reg. 20.2104-

1(a))

U.S. Real Estate

1. U.S. situs property 2. Included in U.S.

taxable estate (Treas. Reg. 20.2104-

1(a))


INVESTMENTS OF NRA

75

U.S. Corporation Stock

U.S. Real Estate

FOREIGN CORPORATION

1. Foreign corporate stock is foreign situs

2. None of the U.S. holdings included in

NRA gross estate Treas. Reg.20.2104-1(a)


CONCLUSION

76





INVESTMENT STRUCTURES FOR FOREIGN INVESTORS IN U.S. REAL ESTATE





INDIVIDUAL/ U.S. LLC OWNERSHIP

79

FOREIGN INVESTOR

U.S. LLC

U.S. REAL

ESTATE

Advantages: •Asset Protection •LT capital gains rate on sale of property •No franchise tax Disadvantages: • Estate tax •Gift tax •Federal Tax Return by foreign Investor •FIRPTA applies on sale of property


OWNERSHIP THROUGH U.S. CORPORATION

80

FOREIGN INVESTOR

U.S.CORPORATION

U.S. REAL

ESTATE

Advantages: •Asset Protection •No gift tax on transfer of shares •No U.S. tax return for foreign shareholder(s) •No FIRPTA on sale of property Disadvantages: • Estate tax •Federal tax on sale at 34% •No LT capital gains rate on sale of property •FIRPTA may apply to sale of U.S. shares •State Franchise tax


OWNERSHIP THROUGH FOREIGN CORPORATION

81

FOREIGN INVESTOR

FOREIGN CORPORATION

U.S. REAL

ESTATE

Advantages: •Asset Protection •No estate tax •No gift •No U.S. tax return for foreign shareholder(s) •No FIRPTA on sale of foreign stock Disadvantages: •34% Federal tax on sale of property •State franchise tax •FIRPTA applies to sale of property • Branch Profits Tax


OWNERSHIP THROUGH FOREIGN AND U.S. CORPORATIONS

82

FOREIGN INVESTOR

FOREIGN CORPORATION

REAL ESTATE

Advantages: •Asset Protection •No estate tax •No gift tax on transfer of the shares •No U.S. tax return for foreign shareholder(s) •No FIRPTA on sale of property •No FIRPTA on sale of foreign stock Disadvantages: •34% Federal tax on sale of property •State franchise tax •FIRPTA may apply to sale of U.S. shares •No LT capital gains rate

U.S. CORPORATION


OWNERSHIP THROUGH IRREVOCABLE TRUST

83

REAL ESTATE

Advantages: •No estate tax •No gift tax (if LLC transferred to trust prior to closing) •No U.S. tax return for foreign investor(s) •LT capital gains rate on sale of property •Succession plan •No franchise tax Disadvantages: •Requires irrevocable transfer of control to trustee •FIRPTA applies to sale of property

U.S. LLC

IRR. TRUST


OWNERSHIP THROUGH U.S. PARTNERSHIP

84

FOREIGN INVESTOR

U.S. REAL

ESTATE

Advantages: •Asset Protection if limited partner •Ability to joint venture with others •No gift tax on gift of interest •No tax at entity level •LT capital gains rate applies Disadvantages: • Estate Tax • Federal Tax Return by Investor • Partnership with holding of foreign partners • FIRPTA applies at partnership & partner level • Franchise tax may apply

U.S. PARTNERSHIP


OWNERSHIP THROUGH U.S. PARTNERSHIP & CORPORATION

85

FOREIGN INVESTOR

U.S. REAL ESTATE

Advantages: •Asset Protection •Ability to joint venture •No gift on transfer of shares •No U.S. tax return for foreign shareholder •No FIRPTA on sale of property Disadvantages: • Estate Tax • Federal Tax rate on sale at 34% • No LT capital gains rate • FIRPTA may apply to sale of U.S.stock

U.S. CORPORATION

U.S. PARTNERSHIP


OWNERSHIP THROUGH U.S. PARTNERSHIP /U.S. CORP/FOREIGN CORPORATION

86

FOREIGN INVESTOR

U.S. REAL ESTATE

Advantages: •Asset Protection •Ability to joint venture •No gift on transfer of shares •No estate tax on foreign investors •No FIRPTA on sale of property •No FIRPTA on sale of foreign stock Disadvantages: • Federal Tax rate on sale at 34% • No LT capital gains rate • State Franchise Tax may apply • FIRPTA may apply to sale of U.S. stock

U.S. CORPORATION

U.S. PARTNERSHIP

FOREIGN CORPORATION


CONCLUSION

87





DISCLAIMER

88

• This information is a presentation of the general rules and should not be used or relied upon for any particular investments or transaction. We recommend you consult your tax attorney or advisor for your specific situation. If you would like more information on these matters we would be glad to visit with you.

• As required by United States Treasury Regulations, you should be aware that this communication is not intended or written by the sender to be used, and it cannot be used, by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under United State federal tax laws.


THANK YOU!

89

Ruben Flores, CPA & ATTORNEY The Flores Group San Antonio Office: Houston/Woodlands Office: 7272 Wurzbach Rd. Suite 901 2002 Timberloch Place, Suite 200 San Antonio, TX 78240 The Woodlands, TX 77380 (210) 340-3800 (281) 292-0044 [email protected] www.Floresgroupusa.com www. Floresattorneys.com


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