Buying in trust, foreigners can save on taxes

Part 2 of 2

(Flickr photo by allie_caulfield)

Foreign buyers who successfully cross financing hurdles then need to consider the most prudent way to hold title to real estate.

Lawyers often advise investors — whether foreign or domestic — to purchase property as a limited liability corporation (LLC).

The chief advantage is that LLCs shields their members from financial claims in excess of the value of the real estate.  In other words, an individual’s others assets are protected.

However, should an LLC own more than one property, all would be liable for a claim against any one of them.  Thus, it is wise for each LLC to own no more than a single property.

LLCs are not subject to corporate taxes, and income passes to the individual members, whose own rates govern the sums due to the government.

In the event of a buyer’s death, the heirs would have to pay more than half the property’s value if the estate exceeds exempted amounts (currently $5 million but possibly plunging to $1 million, depending on Washington).

One way to avoid the estate tax would be to combine ownership with an irrevocable trust and dual-member LLC, counsels New York City lawyer Michael J. Romer.  Says he:

Generally speaking, it is not advisable for a non-U.S. investor to purchase real estate in his/her name.

Other options include purchasing via a foreign holding company or such a company tied to an LLC.

Each has its tradeoffs.  The owner of more than half the stock in a foreign holding company must disclose the situation to the IRS and thereby pay U.S. income tax.

In addition, such a company faces a branch profits tax of approximately 30 percent ( in addition to a 35 percent corporate tax rate).

When an LLC and a foreign holding company are linked, the  branch profits tax doesn’t apply.  Yet annual income and sale profits will be taxed at the corporate tax rate.

Each of the foreign holding company arrangements avoids federal and state capital gains taxes, while none of the LLC models nor individual ownership skirts those liabilities.

Foreign tax treaties can change everything, eliminating branch profits and estate or gift taxes, depending on the structure.

The tax implications of foreign ownership are hardly immaterial.

Aside from ordinary tax on investment income, those capital gains taxes can amount at this point to 15 percent on the federal level and 8.82 percent on the state level.  In addition, there is to be a 3.8 percent levy on rental income starting Jan. 1.

For overseas parents seeking to help their offspring obtain housing, the best news is that they won’t have to pay a gift tax.

As Michael Romer points out, “. . . the appropriate structure depends upon each investor’s specific situation.”

The esoterica of what I have tried to outline accurately here are way above my pay grade, so any foreign buyer certainly should consult with an experienced tax attorney, accountant or both before making a purchase.

Tomorrow: Weekly Roundup

To take your own bite out of the Big Apple, you have the option here to search all available properties privately.

Subscribe by Email

Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

Malcolm@ServiceYouCanTrust.com
Web site