14 September 2017 | Publications
Buying U.S. Real Estate
Interested in purchasing real estate in the US? Then you or your client will need to give serious thought to a number of issues including possible ownership structures. For non-US tax residents, a number of options exist.
The main pitfall of owning a property located in the US is the potential exposure to the onerous US federal tax system. Using a structure can help in this regard. This brief article suggests different structures that may assist the non-US tax resident in protecting their US real property from the Federal Estate Tax, and how to minimize exposure to the Federal Capital Gains Tax on the disposition of US real estate. We do not cover in this article how to minimize exposure to US Income Tax on US rental income, which is also of great importance to a non-US tax resident.
What are the applicable US taxes?
The key US federal taxes to be aware of are:
Federal Estate Tax (“FET”): up to 40% above the exemption of US$60,000 for non-US persons. Non-US persons are liable to FET on assets situate in the US, such as US real estate or US shares (e.g., Apple, Google shares). In recent months, there has been discussion of repealing the FET by the US Congress.
Federal Capital Gains Tax (“FCGT”): a rate between 15 – 20% applies on the eventual sale of the US property if the US property is held in personal name or through a partnership or a trust. A maximum 35% rate applies if the US property is held through a US or non-US company structure.
What are other relevant issues?
Privacy: The ownership of any purchased US land is a matter of public record at the land registry where the property is located. This not only discloses the identity of the owner but also the price paid. Another consideration is the disclosure requirements to the US Internal Revenue Service (“IRS”), which seem to be ever increasing, even for non-US tax residents.
Other Issues: There are other factors that may influence a purchaser’s choice of ownership structure. These include financing, exposure to local taxes where the purchaser is resident, protection from divorce or bankruptcy or inheritance laws of the purchaser’s resident country. It is therefore critical that any cross–jurisdictional aspects of the structure are considered when choosing an appropriate structure.
What are the options for holding US real estate?
Personal Ownership: this is the simplest and least expensive option. The main tax exposure is FET on death of the owner but this liability can be covered by life insurance or a mortgage on the property. Compared to other options, direct ownership of the property minimizes fees and inconvenience. A FCGT charge will range between 15% and 20% on any gain on the sale of the US property.
Non-US Company: a non-US company should protect the US property value from FET, and equally offers some level of privacy of ownership. In contrast, a US company does not protect the property value from FET—many individuals purchase US real estate through a US company only later to find that it does not offer FET protection (especially US LLCs). Up to a 35% FCGT charge applies to any gain on the sale of the US property with either a US or non- US company; however, it is critical to consider the “branch profits” tax, which could add an additional 30% on top of the FCGT. The administrative costs of companies are usually quite low.
Partnership: a non-US partnership offers protection of the property value from FET and a 15% – 20% FCGT charge on gains on the sale of the US property. There is some level of uncertainty with regards to FET protection. A partnership does not offer the same level of privacy as a non-US company or trust structure, and the administrative costs are often higher.
Trust: a non-US trust provides a happy medium between personal ownership and ownership through a non-US company because it protects the property value from FET, offers a 15%- 20% FCGT charge on gains on the sale of the US property, and can offer privacy of ownership.
|FCGT||15-20%||Up to 35%||Up to 35%||15-20%||15-20%|
* Privacy at the land registry level, but disclosure required to IRS on Forms 1120 and 1120-F
What is “best” structure for holding US real estate?
Purchasing US real estate through a non-US company structure offers protection from FET, but a subsequent sale of the property may trigger a up to 35% FCGT on the gain, and a potential “branch profits” tax. Similarly, a trust may lower the FCGT on a sale proceeds to 15% – 20%, but may result in a higher risk to the FET protection if the trust is not properly managed.
The most appropriate structure will therefore depend on various factors such as the cost of the property, how long it will be held, whether the property will generate rental income, and a variety of other issues. As each structure comes with benefits and detriments, a compromise may be needed in order to arrive at the “best” structure.
This alert is not exhaustive and does not cover every single aspect of referred laws. The information provided in this alert should not be construed as legal advice or legal opinion regarding any specific facts or circumstances.
This alert was provided by Anaford AG, who have taken all reasonable care to ensure that the information contained in this alert is accurate at the time of publication.