Our foreign friends are buying U.S. investment properties at the highest pace in many years. The U.S. real estate market has often been considered one of the best safe havens for your money and 2017 is proving to be a stellar year for foreign based activity.
Aside from identifying the best property for your financial objectives in the best possible location to fulfill those objectives, you want to structure the property purchase in the best possible position to guard against double taxation and to protect your interest against liabilities.
Today we will look at many common practices along with providing the common disclaimer
TALK TO YOUR TRUSTED TAX ADVISOR AND ATTORNEY
Investing in real estate requires proper diligence on your part to make sure that your best interest for your particular financial picture is properly obtained.
Investing overseas can be even more delicate and requires someone that understands international taxation laws. We can certainly assist in providing good people that specialize in this if you are in need of someone.
Here are some commonly used structures that our foreign investor friends have used and you may wish to discuss with your trusted advisors
This is chosen by those who tend to hold few properties that have less equity in the property. It is by far the simplest and easiest one to set up. The downside is it does not offer the liability protection that many of the other entities offer.
A foreign investor may acquire real estate individually. This requires minimal setup and allows for reduced tax and compliance issues. However, even though owning real estate individually is easy to maintain, it does not offer the legal protection that other structures offer, such as a limited liability company. We will discuss this structure in greater detail shortly.
Limited Liability Company (LLC)
This business entity is often a favored choice for domestic investors as it provides tax efficiencies along with flexibility in the operational side of the business. It also offers for limited liabilities that you find within a large corporation.
As an owner of an LLC you are referred to as a member. The benefit of this entity is you can be a single member or have an unlimited number of members. The members are generally considered to have protections from personal liability for their business decisions as long as these activities are not considered wrongful or unlawful.
Another benefit is the ability to be taxed as a corporation or a partnership as long as you have at least 2 members. The entity itself does not pay income taxes and this passes through to its members to be taxed.
Many of our foreign friends like this entity as well, however certain countries do not recognize the American LLC in their home country which is why discussing this with a tax professional is paramount.
Requires at least 2 members and they must file an annual information return to report their income along with appropriate deductions, but the entity itself does not pay income taxes and passes the income thru to its partners.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.
Partnerships are very flexible entities and are often used for real estate activities. If you are pooling your funds together with other partners then this would be the filing option for you.
There are a variety of different types of trusts available and often a foreign investor will find a trust to benefit them. Some of these trusts offer similar protections to the corporations or the LLC but with less of the formalities. Again careful consideration to setting this up to get the right structure for your needs is important.
There are a number of other entities such as S corporations and C corporations and even the foreign corporations but I have not seen these used as much.
There are certain things that need to be adhered to in some countries to make these entities work efficiently and not subject you to double taxation. I cannot re-iterate enough… if you do not have perfect clarity which is best for your long term objective, you want to talk to an international tax advisor as well as an attorney to find the best entity to cover your needs.
You need to look at this both from liability protection standpoint as well as a financial savings standpoint which is why I always recommend both your attorney and accountant work together on this as each of these professionals have a different objective. One is watching for liabilities and one is watching for tax savings. Getting everyone on the same page is what provides you the best entity set up for your needs.
Questions for your consideration:
- What country are you investing in?
- Is this strictly investment property or does it double as a second home?
- What types of asset protection do you currently have in place?
- How long do you plan to hold the property?
- How many properties will you own in this country and in which states?
- How many owners will there be, just you, you and a spouse, you and others?
- How much debt will you have on the property / How much equity will you have on it?
- Type of property. house, apartment building, raw land, commercial property?
If you would like to talk about your options for investing in the US, contact me and we start talking about what your options are today!
Happy investing !!