This webinar introduces some of the most important tax issues that non-US investors in U.S. real estate should consider. You will learn: - Introductions to US Real Estate investment by Foreign Investor - FDAP income (Not trade or business income) - Effectively Connected Income (ECI) - Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) - Choice of proper investment structure and tax planning - Tax Implications for:- Rental income tax- Capital Gain Tax on the eventual disposition of property- Estate/Gift tax consequences - Other consideration- Anonymity – Nondisclosure of the identity- Assets protection- The simplicity of the structure balances against complexity costs.

2. • Introductions to US Real Estate investment by Foreign Investor
• FDAP income (Not trade or business income)
• Effectively Connected Income (ECI)
• Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
• Choice of proper investment structure and tax planning
• Tax Implications for
o Rental income tax
o Capital Gain tax on eventual disposition of property
o Estate/Gift tax consequences
7. Other consideration
o Anonymity – Non disclosure of identity
o Assets protection
o Simplicity of structure to balance against complexity costs.
Webinar Overview:

4. Who are Foreign Investors?
A Foreign investor is a non-resident alien individual who is
• Not a U.S. Citizen
• Does not have Green Card
• Does not meet the “Substantial Presence Test”:
To meet this test, a person must be physically present in the United States
on at least:
• 31 days during the current year, and
• 183 days during the 3-year period that includes the current year and the
2 years immediately before that, considering:
• All the days a person was present in the current year, and
• One-Third (1/3) of the days a person was present in the first year before
the current year, and
• One-sixth (1/6) of the days a person in the second year before the
current year.
A Foreign investor is also foreign entity (Corporation, trust, partnership etc

5. • Fixed or determinable annual or periodic income (FDAP) income
also subject to tax by the US
• This includes interest, dividends, rent, etc.
• The default classification for rental income is FDAP income.
• FDAP income is generally subject to a flat 30% tax (or lower treaty)
rate on “Gross income” and deductions are not permitted.
• Non-Residents are taxed in the US on income effectively connected
with a US trade or business (ECI) on a NET basis
• Trade or business is not defined in Code/regulations but is any
profit motive activities carried on in the US on a regular, substantial,
and continuous basis are classified as trade or business for these
purposes.
FDAP income and Effectively
Connected Income

6. Nonresident are permitted to file an election
under Sec. 871(d) for individual and Sec. 882(d)
for corporations to treat income generated by
US real property as ECI
Nonresidents – Election to treat
real property income as ECI:
Property must be income producing for
election to be made
Election cannot made if property producing
expenses but no income
Election remains in effect all subsequent years
until revocation

7. Reg. 1.871-10(d)(1)(ii)-
ECI election
• Schedule of all the nonresident’s US real property (and level of
ownership)
• Location of each real property
• List of improvements, and
• Information on prior net elections
• Real estate held by partnership – election made by partners (rather than at
the partnership level)

8. Disposition of US Real Property
Interest - FIRPTA General Rules
The sale, exchange, or transfer of United States Real Property by foreigners
may be subject to special withholding. The amount of withholding required is
typically 15% of the sales price.
IRC 1445 - Buyer is responsible for making sure the IRS receives the
withholding Tax within the 20 days period.
Payment of withholding tax is sent to IRS with form 8288 and 8288-A
Part I is competed if the buyer is an individual person
Part II is completed if an “Entity” is the buyer

11. • Withholding is not the tax itself, and hence less taxable gain or loss on sale
causes cash flow problem due to withholding.
• This exemption is exemption/reduction from withholding and not from tax/tax
filing.
• Under some circumstances, withholding may be reduced or eliminated.
• Buyer intends to use the property as residence at least 50% of time in 2 years from
closing
• Buyer must be an individual
Sales price $300,000 or less - 0% Withholding Tax
Sales price 300,001 - $1,000,000 - 10% Withholding Tax
Sales price more than $1,000,000 - 15% Withholding Tax
Withholding
Exemption/Reduction

12. FIRPTA withholding Options:
• Request a Reduction of Withholding Certificate Prior to Closing
• Allow Withholding to Occur and Request a Claim of Refund by filing the Non-Resident Income Tax
Return
• Treas. Regulation 1.1445-3
• Treas. Regulation 1.1445-6
• Rev. Proc. 2000-35
• IRS Publication 515
• Prepare Form 8288-B
• Prepare Attachment to Form 8288-B
• Calculation of capital gain tax
• If rental property, calculation of depreciation recapture and suspended passive losses, if
applicable.
Request a Reduction of Withholding
Certificate – Form 8288-B

13. • File Form 1040NR
• Must have stamped Copy A of Form 8288-A to get refund back from IRS
• If foreign person does not have ITIN they need to obtain one
Allow Withholding to Occur
and Request a Claim of
Refund by filing the Non-
Resident Income Tax Return

14. If a Non resident owns US Real
Property through 100% owned
LLC, can they avoid FIRPTA?
• The answer is NO
• Starting in 2017, all foreign-owned Single-Member LLCs that are Disregarded Entities are
now treated as Corporations for federal reporting requirements (submitting information) to
the IRS. This doesn’t mean the LLC is paying tax like a Corporation, but rather, it’s simply
reporting information like a Corporation.
• So, you may have to file Form 1120 page 1 and Form 5472 – Failure to file penalty is
$25,000
• In addition, there is New FinCen Form for Beneficial Ownership Disclosure starting in
2022. – Failure to file penalty is $10,000

15. • When a Nonresident makes a 6013(g) election to file jointly with their US spouse,
they are agreeing to be taxes as a US tax resident.
• Reg §1.897-9T – Resident alien individuals includes nonresident alien who has
elected to be resident under Code sec 6013(g).
• IRC 121 allows an individual taxpayer to exclude up to $250,000 (or $500,000 if
married) of gain if they lived in Primary Residence for two out of the last five
years.
If I make a 6013(g) election
will this exempt me from
FIRPTA?
Does the IRC 121 Exclusion
apply to Non-Residents?

16. Estate Tax:
• -Nonresident individuals subject to tax on all property located within the US
• -Shares of a domestic corporation are subject to estate tax but shares of foreign
corporation are not.
• Some exceptions: Bank account not used in US trade or business, securities generating
portfolio interest
• Nonresident individuals receive a $60,000 estate tax exclusion with maximum 40% tax
rate.
Gift Tax:
• Nonresident normally are subject to gift tax on lifetime gifts of tangible property within the
US
• No specific gift tax exclusion for nonresident individuals, thought the $16,000 per donee
annual exclusion is available
Nonresident individual – Transfer
Taxes

17. • Nonresident who live, work, or own property in the US need to have a clear understanding of the potential
implications of the US estate and gift tax rules.
• There are multiple types of ownership options available:
Structuring Nonresident US Real Estate
Investments

19. Advantage
• Graduated individual tax rates for rental income - 10%-37%
• Long term Capital Gains tax rate 0%-20%
• No Branch Tax Concern
Disadvantage
• Gift / Estate Tax applies
• Unlimited Personal Liability
• Disclosure of ownership
OPTION 1 – Individual ownership

20. Advantage
• Graduated individual tax rates for rental income - 10%-37%
• Long term Capital Gains tax rate 0%-20%
• No Branch Tax Concern
• Limited Personal Liability
• Personal Identity Protection
Disadvantage
• Gift / Estate Tax applies
OPTION 2 – Limited Liability Company

21. Advantage
• Flat Corporate tax rate of 21%
• No Branch Tax Concern
• Limited Personal Liability
• Personal Identity Protection
• No gift tax – IRC 2501(a)(2) – US situated intangible property
including stock of US corp is not subject to gift tax
Disadvantage
• Estate Tax applies
• Capital Gain taxable as ordinary income
• Double taxation - Dividend taxable
OPTION 3 – U.S. Corporation

22. Advantage
• Flat Corporate tax rate of 21%
• No Gift or Estate Tax
• Limited Personal Liability
• Personal Identity Protection
Disadvantage
• Branch Profit Tax
• Capital Gain taxable as ordinary income
• Double taxation - Dividend taxable
OPTION 4 - Foreign corporation (Not with
Inheritance Tax Treaty country)

23. • The asset in the decedent’s gross estate is stock/shares in a foreign
corporation. Foreign corporation stock/ shares are a foreign situated asset
and are excluded from the gross estate.
• BPT can be avoided with proper tax planning. BPT can be avoided if the
death tax treaty (inheritance tax treaty) exists.
• At present Death, tax treaties are in effect with the following countries:
Australia, Greece, Austria, Ireland, Canada, Italy, Denmark, Japan, Finland,
Netherlands, France, South Africa, Germany, Switzerland, United Kingdom.
• Exist the USA - Form 8848 - BPT does not apply in the year that a foreign
corporation terminates all US business activities.
Why Foreign Corporation works:

24. Advantage
• Flat Corporate tax rate of 21%
• No Estate or Gift Tax
• No Branch Profit Tax
• Personal Identity Protection
Disadvantage
• Capital Gain taxable as ordinary income
• Double taxation - Dividend taxable
OPTION 5 – Tiered Corporate
Entities

25. Advantage
• No Estate Tax
• No Branch Profit Tax
• Long term Capital Gains tax rate 0%-20%
Disadvantage
• Give up ownership and control of assets
OPTION 6 – Non Grantor
Trust

26. • No assets are includable in the decedent’s gross estate. IRC 2031.
• Settlor: The Settlor is the person who creates the trust by placing a particular
asset that s/he owns into the trust, which are managed by trustee for the
benefit of beneficiary
How irrevocable trust eliminates
estate tax:

27. Do You
Have Any
Questions? An Informative Session On:
"U.S. Taxation For Non-Resident Aliens"

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