Investing in US real estate as a non-resident is very easy to get into but rather tricky or downright nasty to get out of. There are two main difficulties involved: the estate tax and FIRPTA. The estate doesn’t matter so much for living clients, but should that status change while holding the property their heirs can find themselves facing a 46% estate tax bill based on the market value of the property at the time of passing away. To avoid this, the property should be held by an entity, and the shares of the entity held by an offshore company.

From the point of view of federal tax, if a non-resident hold US real estate then they are doing business in the US and liable for reporting and payment of taxes on their US source income. For these non-residents, this means paying a 30% withholding tax on the gross rental income without being able to deduct any expenses. Furthermore, under the new FBAR rules, if they own rental real estate in the US, and don’t put the real estate into an entity, then the owners themselves must file an FBAR report on their non-US bank accounts. If they use a domestic corporation to hold the real estate, the taxable income would be based on gross income less expenses and depreciation, and taxed on a graduated scale from 15% to 35% of net income.

The other problem is when the property is eventually sold off. If the property is held by a non-US resident there is a withholding tax based on the sale price, even if the property has been sold at a loss. For this reason, a domestic corporation is normally the type of entity used to hold the title, and whose shares would be held by the offshore company. If a client insists that they are more comfortable with an LLC, then the LLC can file a change of tax status from disregarded entity to corporation status, and thus get the same treatment as a domestic corporation for FIRPTA.

Therefore, our general recommendation is that your clients own any US property by setting up a US corporation in the State where the property is located, and have the shares of this corporation be held by an offshore company in an inexpensive jurisdiction like Belize, Seychelles or Samoa. The corporation will have to file a corporation tax return accompanied by another form declaring foreign ownership of more than 20%, but at least it will pay taxes at the domestic rate and will not be subject to FIRPTA nor the estate tax on foreigners. If your clients own US real estate through an LLC, and assume that they can take the earnings out without US tax, they might find that it works for a while, but ultimately will have some very angry tenants who find out they should have withheld 30% of their rent and sent it to the IRS instead – the IRS quite unforgiving to them!

If you are a non-US resident looking to purchase US real estate, contact us for a consultation on how to minimize your risks of ownership – and eventual sale.