Foreign investment in us real estate august 10 2012 - jg updated

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Summary of tax issues in foreign inbound investment in real estate

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Foreign investment in us real estate august 10 2012 - jg updated

  1. 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, 2012IRS 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 penaltiesunder the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
  2. 2. OUTLINE1. Income Tax and Withholding Obligations2. Structuring Foreign Investment in U.S. Real Estate3. Like-Kind Exchange Transactions4. Estate and Gift Issues 2
  3. 3. INCOME TAX AND WITHHOLDINGEffectively Connected Income• Income effectively connected with a U.S. trade or business• Rates – 10% to 35% Individual; capital gains – 15% to 35% corporateFixed, determinable, annual or periodical(FDAP) income• Activity not rising to level of trade or business• 30% withholding rate, may be reduced by treaty 3
  4. 4. INCOME TAX AND WITHHOLDINGForeign 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 4
  5. 5. STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign PersonOwnership Through Foreign Corp.U.S. Tax System Exposure for Foreign Person YESCapital Gains Rate (15%) on Disposition NOWithholding Tax on Repatriation of Funds NO Foreign Corp.Branch Profits Tax YESTax Free Sale of Entity / Asset YES 5
  6. 6. STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign PersonOwnership Through U.S. Corp.U.S. Tax System Exposure for Foreign Person YESCapital Gains Rate (15%) on Disposition NOWithholding Tax on Repatriation of Funds YES U.S. Corp.Branch Profits Tax NOTax Free Sale of Entity / Asset NO 6
  7. 7. STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign PersonOwnership Through Foreign Corp. and U.S. Corp.U.S. Tax System Exposure for Foreign Person NOCapital Gains Rate (15%) on Disposition NO Foreign Corp.Withholding Tax on Repatriation of Funds NOBranch Profits Tax NOTax Free Sale of Entity / Asset YES U.S. Corp. 7
  8. 8. STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign PersonDirect OwnershipU.S. Tax System Exposure for Foreign Person YESCapital Gains Rate (15%) on Disposition YESWithholding Tax on Repatriation of Funds NOBranch Profits Tax NOTax Free Sale of Entity / Asset NO 8
  9. 9. STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign PersonOwnership Through U.S. LLC or Foreign LLCU.S. Tax System Exposure for Foreign Person YESCapital Gains Rate (15%) on Disposition YESWithholding Tax on Repatriation of Funds NO U.S. or ForeignBranch Profits Tax NO LLCTax Free Sale of Entity / Asset NO 9
  10. 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 10
  11. 11. ESTATE AND GIFT TAX RATESNON-U.S. DOMICILED NON-CITIZENS Applicable to U.S. Situs Property But, what about gifts or bequests to a non-citizen spouse? 11
  12. 12. ESTATE AND GIFT TAX RATESApplicable to U.S. Citizens or Domiciliaries: 12
  13. 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.? 13
  14. 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 14
  15. 15. 32
  16. 16. PALO ALTO LOS ANGELES SAN FRANCISCO1717 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 16
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