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40%: The Big Tax Hit On Foreign Buyers

Real estate attorneys and professionals are without a doubt familiar with the FIRPTA withholding rules on U.S. property sales and rental income for foreign investors.   The technical term for such investors is “non-resident alien”; this is an investor who does not hold a green card and meets other requirements.

Taxes that are often over-looked before a foreign investor purchases property in the United States are the Federal estate and gift taxes on foreign investment.  While welcoming foreign investment, the U.S. nevertheless imposes a high estate and gift tax on the portion of the foreign individual’s gross estate – those assets controlled by the taxpayer and situated in the U.S. – that exceed $60,000.   (For U.S. citizens this exemption is now $5.25 million.)

The tax rate is 40% for all assets in the gross estate over $60,000.

The gross estate of the foreign decedent includes real estate as well as other assets, such as stocks of corporations and membership interests in LLC’s (limited liability companies) organized in the U.S. 

Note:  The same rate and exemption apply for gifts by a foreign investor.

Six Months and the Substantial Presence Test for Income Taxes

Some foreign investors think they are fine as long as they do not stay in the United States more than 6 months in a year.  First, this rule applies only for U.S. income taxes.  Second, this is technically incorrect.  A foreign investor is deemed to be a U.S. resident for income tax purposes if the average number of days over a three year period equals or exceeds 183 per year.  However, there is a “substantial presence” test where a foreigner will generally become a tax resident if he or she is physically present in the U.S. for more than 120 days per year.  Note: there are exceptions to this rule.

No Six Months Rule For Federal Estate & Gift Taxes

For U.S. Federal estate and gift taxes, it makes no difference how long the foreign investor is in the U.S.  As mentioned above, the U.S. looks to the size of the foreign investor’s gross estate in the United States.

There Are Solutions

Before any foreign investor takes title or control of U.S. real estate, FIRPTA requirements, as well as U.S. income tax, corporate tax, branch profits tax,  Federal estate and gift taxes, and other potential taxes should be analyzed.  It may be advantageous  for the foreign person to own U.S. real estate through a foreign corporation that is controlled by a foreign trust.  There may be other structures best tailored for the foreign investor.  However, a structure that works for one foreign investor may not work for another

Conclusion:

All foreign investors should know about the 40% U.S. estate and gift tax, and the other taxes imposed by the U.S. whenever a foreign investor takes title or control over U.S. real estate or other property. 

We welcome your comments or questions, and are available to assist your clients.  For more information contact  Miami trust attorney Phil Rarick or tax attorney Jay R. Beskin at (305) 556-5209 or  info@raricklaw.com.

Special Note

The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an experienced Miami asset protection attorney. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.

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