Summary of tax issues in foreign inbound investment in real estate

1. FOREIGN INVESTMENT IN U.S. REAL
ESTATE
Roger Royse
Royse Law Firm, PC
1717 Embarcadero Road
Palo Alto, CA 94303
rroyse@rroyselaw.com
www.rroyselaw.com Commercial REO
Skype: roger.royse Brokers
Association
August 10th, 2012
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2. OUTLINE
1. Income Tax and Withholding
Obligations
2. Structuring Foreign Investment in
U.S. Real Estate
3. Like-Kind Exchange Transactions
4. Estate and Gift Issues
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3. INCOME TAX AND WITHHOLDING
Effectively Connected Income
• Income effectively connected with a U.S.
trade or business
• Rates
– 10% to 35% Individual; capital gains
– 15% to 35% corporate
Fixed, determinable, annual or periodical
(FDAP) income
• Activity not rising to level of trade or
business
• 30% withholding rate, may be reduced by
treaty
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4. INCOME TAX AND WITHHOLDING
Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
• 10% gross withholding on dispositions of a U.S. Real Property
Interest or U.S. Real Property Holding Corporation (USRPHC)
• Exemptions from withholding
– Affidavit of non foreign status
– Non recognition transactions
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5. STRUCTURING FOREIGN INVESTMENT IN U.S.
REAL ESTATE
Foreign Person
Ownership Through Foreign Corp.
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition NO
Withholding Tax on Repatriation of Funds NO
Foreign Corp.
Branch Profits Tax YES
Tax Free Sale of Entity / Asset YES
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6. STRUCTURING FOREIGN INVESTMENT IN U.S.
REAL ESTATE
Foreign Person
Ownership Through U.S. Corp.
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition NO
Withholding Tax on Repatriation of Funds YES
U.S. Corp.
Branch Profits Tax NO
Tax Free Sale of Entity / Asset NO
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7. STRUCTURING FOREIGN INVESTMENT IN U.S.
REAL ESTATE
Foreign Person
Ownership Through Foreign Corp. and U.S. Corp.
U.S. Tax System Exposure for Foreign Person NO
Capital Gains Rate (15%) on Disposition NO
Foreign Corp.
Withholding Tax on Repatriation of Funds NO
Branch Profits Tax NO
Tax Free Sale of Entity / Asset YES U.S. Corp.
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8. STRUCTURING FOREIGN INVESTMENT IN U.S.
REAL ESTATE
Foreign Person
Direct Ownership
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition YES
Withholding Tax on Repatriation of Funds NO
Branch Profits Tax NO
Tax Free Sale of Entity / Asset NO
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9. STRUCTURING FOREIGN INVESTMENT IN U.S.
REAL ESTATE
Foreign Person
Ownership Through U.S. LLC or Foreign LLC
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition YES
Withholding Tax on Repatriation of Funds NO
U.S. or Foreign
Branch Profits Tax NO LLC
Tax Free Sale of Entity / Asset NO
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10. LIKE-KIND EXCHANGE TRANSACTIONS
• Section 1031 like-kind exchange transactions
– Permits tax deferral
– U.S. property is only “like-kind” to other U.S. property, and
foreign property is only “like-kind” to other foreign
property
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11. ESTATE AND GIFT TAX RATES
NON-U.S. DOMICILED NON-CITIZENS
Applicable to U.S. Situs Property
But, what about gifts or bequests to a
non-citizen spouse?
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12. ESTATE AND GIFT TAX RATES
Applicable to U.S. Citizens or Domiciliaries:
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13. INBOUND GIFT OR INHERITANCE
ASSET TRANSFER ISSUES
• Intangible Assets
– Stocks, LLC & LP interests, patents, copyrights, etc.
– General rule—intangibles are located where the giver is located.
• Tangible Assets
– Real estate, equipment, automobiles, jewelry, artwork, etc.
– General Rule—tangible assets have situs where they are physically
located.
• But, what about cash, currency, bank accounts, etc.?
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14. COMMON ESTATE PLANNING ISSUES FOR
CROSS-BORDER FAMILIES
• Inbound Cash Transfers Foreign Parent
– Gifts?
– Loans?
– Investments? Gift or Loan $
$ Investment
• Transfers of Stock/LLC interests? U.S. Child
Gift of
Stock
– U.S. Stock? Investment
$ Rent
– Foreign Stock? Entity
(Corp. LLC, et al)
Lease
• Foreign Trustees & Successor Trustees
– U.S. person is often preferable. Purchase $
$ Purchase
• U.S. income tax issues.
• U.S. reporting issues
• Logistics
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16. PALO ALTO LOS ANGELES SAN FRANCISCO
1717 Embarcadero Road 11150 Santa Monica Blvd., 135 Main Street,
Palo Alto, CA 94303 Suite 1200 12th Floor
Los Angeles, CA 90025 San Francisco, CA 94105
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