2. 2
US Tax Planning Issues with US Real
Estate
Matthew Ledvina
2 October 2015 - Zurich
3. Motive in Purchasing US Real Estate?
3
• Commercial v Residential
• Leisure—plan to use the property for
personal use.
• Investment—plan to rent out
property or hold and sell for a gain.
4. Investing in the US, the US tax exposure...
4
US Tax Issue Planning
US Income Tax on Rental
Income
Corporate Investors: Maximum 35% Federal Tax Rate,
Branch Profits Tax varies and can range from around
19.5% to 30% on top of corporate tax rate. .
Individual Investors: Maximum 39.6% Federal Tax Rate
Ensure investor is able to offset
expenses against income.
For corporate investors, avoid
“branch profits tax”
US Capital Gains Tax on the
Sale
Corporate Investors: Maximum 35% Federal Tax Rate
Individual Investors: Maximum 20% Federal Tax Rate
Use a partnership structure
instead of a corporate structure
to lower the capital gains rate to
a maximum of 20%
US Estate and Gift Tax Corporate Investors: Zero
Individual Investors: Maximum 40% with only a 60,000
USD exclusion
Use either a corporate structure
or a partnership structure to
legally avoid the US estate tax.
Generally, no gifting of US real
estate.
Big Picture: all US tax planning strategies have pros and cons, no 100% perfect investment plan
5. The Classic Plan
5
Non-US
Investor
US Real Estate
Non-US
Investor
US Real Estate
US LLC
US Tax Classification: Disregarded
Structure 1: the Classic Plan
OR
.
Description: Holding US real estate directly, or
through a US LLC with a single
owner.
Structure: Simple and inexpensive, most typical
structure used by most non-US
investors. Simple US tax compliance
because owned directly or through an
LLC.
US income
tax:
Non-US investor usually will have to
file a US tax form to report rental
income. If not rented, then no US tax
forms to file until disposition.
US capital
gains tax:
15-20% on the sale of the property.
10% FIRPTA withholdings on gross
proceeds of the sale, but this can be
claimed back by non-US investor.
US estate tax: Achilles' heel of the Classic Plan is
the US estate tax exposure: 40%.
So, a property worth 2,000,000 USD
will be subject to nearly a 40%
effective rate (745,000 USD). Even
worse if husband and wife own
property jointly.
6. A better plan? The Corporate Structure
6
Non-US
Investor/s
OR
Trust/Foundation
US Real Estate
Structure 2A: the Corporate Structure
.
Description: Holding US real estate through a non-US
corporate vehicle.
Structure: More complicated, but can still be inexpensive
to run depending on corporate directors and
shareholder ownership. US tax compliance
cost is a bit higher because the structure is
more complicated.
Corporation
Tax:
Corporate structure is likely doing business in
the US if rental income received, so corporate
tax rates (maximum 35%) would apply. Branch
profits tax (BPT) can also apply which could
push annual tax quite high. US tax treaties can
reduce BPT to zero or 5%, depending on
jurisdiction of the company. The sale of the
property would also be taxed at rates of up to
35%, so no lower capital gains tax rate of 15-
20% is available.
Estate tax: No US estate tax exposure as holding vehicle
is corporate.
Offshore Limited
Jurisdiction: Anywhere but the US
US Tax Classification: Corporation
7. A better plan? The Corporate Structure
7
Non-US
Investor/s
OR
Trust/Foundation
US Real Estate
Structure 2B: the Corporate Structure
.
Description: Holding US real estate through a US LLC,
which is owned by a non-US company.
Structure: Similar to Structure 2A apart from interposing
an LLC to own the US real estate. The US
LLC does not change US tax effects, but it
does make it easier to have a US bank
account, administer real estate from a US
company, local manager is possible of the LLC
to collect rents, pay tradesmen, and easier for
sale of property.
Corporation
Tax:
Identical to Structure 2A
Estate tax: Identical to Structure 2A
Offshore Limited
Jurisdiction: Anywhere but the US
US Tax Classification: Corporation
US LLC
US Tax Classification: Disregarded
8. A better plan? The Corporate Structure
8
Non-US
Investor/s
OR
Trust/Foundation
US Real Estate
Structure 2C: the Corporate Structure
.
Description: Holding US real estate through a US LLC, which is
owned by a non-US company.
Structure: Similar to Structure 2B, however in this case a LLC
(electing corporate status) or Corporation owns the US
real estate. As with Structure 2B, simpler administration
to have a US entity administer, collect rents
Corporation
Tax for
Offshore
Limited:
• No US corporate tax, including no branch profits tax.
• Portfolio interest from US Corp may be exempt from
US withholdings tax.
• Dividends received from US Corp subject to 30% US
withholdings tax which could be reduced to 5% (e.g.,
UK, Belgium, Germany, Switzerland.
• Gain from sale of US corp shares subject to US
income tax (maximum 35%) if the US corp is a US
real property holding company.
Corporation
Tax for US
Corp/LLC:
US corporate tax up to 35% on rental income or sale of
US real property.
Estate tax: Identical to Structure 2A and 2B
Offshore Limited
Jurisdiction: Anywhere but the US
US Tax Classification: Corporation
US Corporation or US LLC
US Tax Classification: Corporation
9. Having the best of both worlds? The Partnership Structure
9
Non-US
Investor/s
OR
Trust/Foundation
US Real Estate
Structure 3A: the Partnership Structure
.
Description: Holding US real estate through a multi-layer
partnership structure where a US
partnership holds the US real estate, and
the US partnership is owned by a US LLC
and Offshore partnership.
Structure: Quite complicated for a simple investor,
costs should be a consideration. US tax
compliance costs are also higher than
Structure 1 as there are several entities.
US Income
Tax &
Capital
Gains Tax:
• Maximum 39.6% on the allocable share
of the non-US partnership’s rental
income.
• Maximum 20% long-term capital gains.
Estate tax: Interesting point…99% certain that US
estate tax does not apply, but not 100% like
Corporate Structure. So, a US investor
trades a little less certainty for the US estate
tax for the lower capital gains rate.
Offshore Partnership
Jurisdiction: Anywhere but the US
US Tax Classification: Partnership
US Partnership
US Tax Classification: Partnership
US LLC/Offshore Ltd
US Tax Classification:
Corporation
100%
99% Limited Partner
100%
1% General Partner
10. Having the best of both worlds? The Partnership Structure
10
Non-US
Investor/s
OR
Trust/Foundation
US Real Estate
Structure 3B: the Partnership Structure
.
Description: Holding US real estate through a
simple one-layer US partnership
structure which in turn holds the US
real estate. Alternatively, holding the
US real estate through a non-US
partnership.
Structure: Compared to 3A, this structure is far
easier. One single entity makes US
tax compliance less expensive as well
(however two partners are required).
US Income
Tax &
Capital
Gains Tax:
Nearly identical to 3A:
• Maximum 39.6% on the allocable
share of the non-US partnership’s
rental income.
• Maximum 20% long-term capital
gains.
Estate tax: Unclear: under certain US tax
guidance, no US estate tax would
apply--less protection from US estate
tax than 3A. Holding through a non-
US partnership might provide more
protection, depending on if the
property is rented.
US Partnership
US Tax Classification: Partnership
OR
Non-US
Investor/s
OR
Trust/Foundation
US Real Estate
Offshore Partnership
US Tax Classification: Partnership
11. Why not a trust instead? The Trust Structure
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US Real Estate
Structure 4: the Trust Structure
.
Description: Holding US real estate through a trust or
foundation. The trust could establish a US
LLC or any type of offshore company for the
sake of administration, collecting rent, and
eventually sale of US real estate.
Structure: Quite simple if US investor already familiar
and comfortable with trust (generally
fiduciary structures). Trustee would
normally be required to file annual US tax
returns if rental income received.
US Income
Tax &
Capital
Gains Tax:
• Maximum 39.6% on rental income.
• Maximum 20% long-term capital gains.
Estate tax: As trust is irrevocable and discretionary, US
estate tax should be 100%. Certain
precautions should be established at the
trust level to ensure US estate tax result.
Trust
Nature: Irrevocable
Jurisdiction: non-US
Settlor: non-US investor
US Tax Classification: Nongrantor
OPTIONAL
US LLC or Offshore Company
US Tax Classification: Disregarded
12. Final Takeaway
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Takeaway
• No perfect solution structure, each have its benefits and detriments.
• In addition to real estate, the structures discussed also could protect non-US
investors who own US shares (e.g., Google and Apple) from the US estate tax.
