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FIRPTA for CPAs
(Backwards. In Less Than One Hour)

   Phil Hodgen • 626-437-2500

   17 June 2010 • San Francisco
Real estate, forward

• Buy
• Hold
• Sell
The moment of truth


• “Whose name do I put on the grant deed
  as the owner?”
Real estate, backwards

• Sale
• Hold
• Buy
Part I. The Sale
1. Get stuff signed
When Mama’s happy...

• Broker (listing agreement)
• Escrow officer
• Title officer
Recommended

• Limited power of attorney
• Pre-approved by title officer
• Will be recorded
2. Withholding
Two problems


• Not enough cash in the deal
• Delay in getting refund
Refund delay


• Time value of money problem
• Interest income lost on expected refund?
Federal withholding

• 10% of sale price
• Reduce with Form 8288-B
• IRS processing time: 5 months
• 30 day escrow
California withholding

• 3 1/3% of sale price
• Form 597-W
• I don’t generally bother (cost/benefit)
3. Final tax returns
Final tax returns


• Estimated payments needed?
• Final tax returns required
Foreign corporations

• Form 1120-F
• Branch profits tax (Form 1120-F, Part III)
• Eliminate with Form 8848
Part 2: Ownership
Issues

• Personal use assets: what is deductible?
• Land: capitalize carrying costs?
• Rental property: how is income tax...
Personal use

• Form 1040-NR: no Schedule A
• No investment or business expense
• No deductions
Investment property

• No income
• No deduction of carrying costs
• No capitalization of carrying costs
Rental property

• Default Federal tax is 30% of gross rent
• Make “net election” to force taxation of net
  income
• Norm...
Special problem
Foreign corp
Branch profits tax


• Normal corporate income tax
• Plus 30% of after-tax profit
Foreign corp
  US corp
Part 3. Buy
Who is the owner?

• Type of taxpayer (rate of income tax)
• Withholding on sale?
• Estate tax?
• Transfer on death proble...
Foreign corp
Foreign corporation

• Branch profits tax on rent
• Higher tax on capital gains
• Expensive estate tax protection
Foreign corporation

• Higher tax on capital gains
• Branch profits tax on rent
• Estate tax protection
LLC
LLC
US Corp
W.o.A.P.W


• High capital gains tax
• No estate tax protection
US Corp
Options

• The “no plan” plan
• Term life insurance
• Foreign corporation
• Irrevocable trust
Irrevocable Trust
Takeaway

• Withholding reduction if the deal needs it
• Make the net election
• Corporate structures bad
Thanks!



           Phil Hodgen
      hodgen.com | firpta.com
phil@hodgen.com | cell 626-437-2500
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2010 06-17 - sf international taxation committee of cal cpa - firpta for cp-as-backwards

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Slides for presentation to CalCPA's San Francisco International Taxation Committee on June 17, 2010. Topic: Foreign investment in U.S. real estate.

Published in: Economy & Finance
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2010 06-17 - sf international taxation committee of cal cpa - firpta for cp-as-backwards

  1. 1. FIRPTA for CPAs (Backwards. In Less Than One Hour) Phil Hodgen • 626-437-2500 17 June 2010 • San Francisco
  2. 2. Real estate, forward • Buy • Hold • Sell
  3. 3. The moment of truth • “Whose name do I put on the grant deed as the owner?”
  4. 4. Real estate, backwards • Sale • Hold • Buy
  5. 5. Part I. The Sale
  6. 6. 1. Get stuff signed
  7. 7. When Mama’s happy... • Broker (listing agreement) • Escrow officer • Title officer
  8. 8. Recommended • Limited power of attorney • Pre-approved by title officer • Will be recorded
  9. 9. 2. Withholding
  10. 10. Two problems • Not enough cash in the deal • Delay in getting refund
  11. 11. Refund delay • Time value of money problem • Interest income lost on expected refund?
  12. 12. Federal withholding • 10% of sale price • Reduce with Form 8288-B • IRS processing time: 5 months • 30 day escrow
  13. 13. California withholding • 3 1/3% of sale price • Form 597-W • I don’t generally bother (cost/benefit)
  14. 14. 3. Final tax returns
  15. 15. Final tax returns • Estimated payments needed? • Final tax returns required
  16. 16. Foreign corporations • Form 1120-F • Branch profits tax (Form 1120-F, Part III) • Eliminate with Form 8848
  17. 17. Part 2: Ownership
  18. 18. Issues • Personal use assets: what is deductible? • Land: capitalize carrying costs? • Rental property: how is income taxed?
  19. 19. Personal use • Form 1040-NR: no Schedule A • No investment or business expense • No deductions
  20. 20. Investment property • No income • No deduction of carrying costs • No capitalization of carrying costs
  21. 21. Rental property • Default Federal tax is 30% of gross rent • Make “net election” to force taxation of net income • Normal Schedule E behavior
  22. 22. Special problem
  23. 23. Foreign corp
  24. 24. Branch profits tax • Normal corporate income tax • Plus 30% of after-tax profit
  25. 25. Foreign corp US corp
  26. 26. Part 3. Buy
  27. 27. Who is the owner? • Type of taxpayer (rate of income tax) • Withholding on sale? • Estate tax? • Transfer on death problems?
  28. 28. Foreign corp
  29. 29. Foreign corporation • Branch profits tax on rent • Higher tax on capital gains • Expensive estate tax protection
  30. 30. Foreign corporation • Higher tax on capital gains • Branch profits tax on rent • Estate tax protection
  31. 31. LLC
  32. 32. LLC
  33. 33. US Corp
  34. 34. W.o.A.P.W • High capital gains tax • No estate tax protection
  35. 35. US Corp
  36. 36. Options • The “no plan” plan • Term life insurance • Foreign corporation • Irrevocable trust
  37. 37. Irrevocable Trust
  38. 38. Takeaway • Withholding reduction if the deal needs it • Make the net election • Corporate structures bad
  39. 39. Thanks! Phil Hodgen hodgen.com | firpta.com phil@hodgen.com | cell 626-437-2500

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