Alternative Structures for Purchase of U.S. Residential Real Estate for Non Residents
I. Individually or through a pass-through entity such as an LLC
The advantage ti this structure is a lower capital gains rate on the net profit. The rate today is 15%. This will be the case for at least until 2013 when the rate is schedule to go up to 20%. The foreign individual will have to have a U.S tax identification number and file U.S tax returns at time of sale of property or on receipt of rental income. The other advantage to this structure is the elimination of double taxation of income if there are rents received and a profit left over after payment of carrying costs and expenses. The disadvantage of this structure is exposure to the estate tax in the U.S as well as possible probate in Florida courts. This structure also has no confidentiality since the real estate records are completely public. We have been advised by Brazilian counsel that if a Brazilian individual does pay capital gains tax in the U.S on the profit of the sale real estate, this tax will be credited against tax due in Brazil. This should be verified with local counsel.
II. Use of a foreign company or a domestic corporation owned by the offshore company
This structure eliminates the risk of the U.S. estate tax. The estate tax is based on the value of U.S. assets at time of death of the non resident with certain types of assets in the U.S. such as real estate. The first $60,000 of assets is exempt from the estate taxation. The remainder is taxed based on a progressive table that can go as high as 35% (to be increased to 55% in 2013). If the property is rented, it is usually recommended the use of a domestic corporation to hold the real estate instead of using only the offshore company. The client can pay rent to the domestic corporation and the domestic corporation can then deduct all reasonable carrying costs of the property including mortgage interest, taxes, maintenance, some travel costs, and depreciation. Annual U.S. tax returns must be filed for the domestic corporation and a tax identification number will have to be applied for with the help of a local accountant. If the client does not want to pay rent and wants a simpler structure, then the use of the foreign company only to hold the real estate is sufficient. A tax return is filed only at time of sale. At that time, we can deduct the costs of improvement to the property, closing costs at time of purchase and sale. If the property is rented, tax returns must be filed annually.