Simple Planning Can Save Foreign Purchasers of U.S. Real Estate Millions of Dollars in U.S. Estate Taxes

Share Article

Absent proper planning, real estate purchased by a foreign investor could cost him or her millions of dollars more than the purchase price. Unlike U.S. residents, foreign investors do not get the benefit of the $2M exclusion (2006) when subject to U.S. estate taxes. With proper planning, foreign real estate purchasers can avoid paying U.S. estate taxes on their property located in the U.S.

Without proper planning in advance of a real estate purchase, a foreign purchaser who dies owning U.S. property directly would owe U.S. estate taxes equal to upwards of 50% of the property value, regardless of whether the property is sold at death (which, in some cases, forces the owner to sell the property just to pay the estate taxes). Before a foreign investor buys real estate here in the United States, he or she should consider structuring the transaction in such a way to avoid U.S. estate and gift taxes and income taxes in connection such real estate.

Generally, if a nonresident alien (an individual who is not a citizen of, and is not domiciled in, the U.S., a “foreign purchaser”) dies owning U.S. assets (like real estate or direct ownership interests in U.S. companies) that have a U.S. taxing situs (jurisdiction), those assets could be taxed at up to a whopping 46% rate (2006 rate) for estate tax purposes upon the owner’s death (this could amount to over 50% taking into account local state estate taxes). By planning and structuring the real property purchase utilizing off-shore entities, a foreign purchaser avoids U.S. estate taxes on such real property. Depending on the country of residence, this same structure can also minimize U.S. income tax on the rental income and gains derived from the sale of the assets and real property.

Craig Delsack, a New York based attorney, recently structured his client’s purchase of a multi-million dollar Manhattan apartment in a way that would avoid at least $1M in U.S. estate taxes in the event his client dies owning the apartment. “As that U.S. estate taxes are based on the value of the property at death, not the gain in value appreciation, without proper planning, the out-of-pocket ‘purchase price’ could be more than 150% what was paid at the closing,” according to Mr. Delsack.

“One preferred structure to accomplish the above goals is to have the foreign purchaser establish a holding corporation outside the U.S.,” says Mr. Delsack. Preferably, this holding company is established in the country of residency (assuming such country has an income tax treaty with the U.S. — income tax treaties generally reduce the U.S. withholding tax on dividends, royalties, rents, and other similar revenue streams). Alternatively, the holding company could be set up in a country with favorable tax rules, such as the Cayman Islands, the Bahamas or Bermuda. Then the newly formed foreign holding company establishes a U.S. subsidiary through which U.S. real estate or other assets are purchased and held. The end result is a foreign holding company being the parent corporation to U.S. subsidiaries holding assets in the U.S. — the foreign purchaser merely owns stock in the foreign holding corporation. Upon the death of the foreign purchaser, there would be no U.S. estate tax on the real estate and other assets held by the U.S. subsidiary since the foreign purchaser only owned shares of a foreign corporation. Shares of a foreign corporation are not taxed for U.S. estate tax purposes.

Foreign purchasers planning on acquiring several properties in the U.S. should consider purchasing each property through a separate U.S. subsidiary to limit the liability of each property solely to that property and to avoid: (1) U.S. income tax attributable to business operations or real estate investments in the U.S. conducted directly by foreign corporations and (2) U.S. income tax payable on the sale of U.S. real estate with respect to the proceeds that flow to the foreign parent corporation.

Further estate planning — Depending on the country of residency, a foreign purchaser could place a revocable foreign trust on top of the foreign holding corporation. By doing so, a foreign purchaser can efficiently handle some of its global estate planning since the provisions of the revocable foreign trust specify what should happen to the shares of the foreign holding corporation upon the death of the foreign purchaser. Of course, the foreign purchaser should have the entire structure carefully reviewed by a U.S. tax and estate attorney to ensure that the foreign revocable trust does not have adverse U.S. tax consequences.

About Craig Delsack:

Craig Delsack, Esq., is the principal attorney of Law Offices of Craig Delsack, LLC (http://www.NYCCounsel.com). The firm is experienced in the intricacies of purchases, sales and financings of commercial and residential properties (including condominiums and cooperative apartments); leasing and subleasing of commercial, office and retail space; and counseling and forming special purpose entities (such as corporations and limited liability companies) for real estate investing and financing. The firm is business-oriented bringing extensive business and legal experience to bear on behalf of its clients, including general corporate, real estate, technology and media licensing related matters. The firm works with a broad range of individuals and business entities from all over the world, including high-wealth individuals, Fortune 500 companies and start-ups.

Contact Information:

Craig Delsack

Law Offices of Craig Delsack, LLC

(212) 688-8944

http://www.NYCCounsel.com

Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, unless otherwise expressly indicated, any federal tax advice contained in this communication is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

###

Share article on social media or email:

View article via:

Pdf Print

Contact Author