Legal/tax structure: buying outside the US
Germany · Member since 2019 · 21 posts · 9 votes
Legal/tax structure: buying outside the US
4 Replies
- New to Real Estate · Hong Kong · Member since 2019 · 44 posts · 16 votes6y
@John Stanley What's your intention/purpose of holding the property through a legal entity as opposed to holding directly in your name?
I would think the optimal structure for holding a property ultimately depends on your goals with the property (e.g. buy and hold for rental profits, flip, etc.), what you're trying to achieve with the asset protection (i.e. why you want to hold the property in an entity) and your exit strategy with the property. Getting clear on these items would be a good place to start.
I'll assume it's US property for now. From a US tax perspective, if you set up a non-US entity where all shareholders have limited liability, by default is it a foreign corporation for US tax purposes. If you also a) hold > 10% of the vote and value of the shares and b) more than 50% is owned by US persons (which, if a German co is held 100% by you, both tests would be met), yes it would be a controlled foreign corporation ("CFC"), unless you make a check the box election to treat it as a foreign disregarded entity. There's very stringent rules on how to do that and the timing of when it needs to happen. The forms for CFCs alone are like 16 pages and it's extremely complex; they are not fun. Assuming the German co was profitable, if you held it this way and paid German tax on the rental profits, unless you make a 962 election, you can't claim a foreign tax credit for the German taxes paid on your individual US tax return so depending on your situation you could get double taxed (when considering the tax paid in both countries) if it's taxable also in Germany, since you mentioned you're a resident (although I have no idea how this would be treated under German tax law). By contrast, a US LLC 100% owned by you would be disregarded so for tax purposes the income on the property would be taxed and reported as if you owned it directly in your own name.
It's worth mentioning that the numbers expected matter. For example, alot of rental properties for buy and hold purposes will create losses for tax purposes (even if positive cash flow) primarily due to depreciation, so the above might be more academic if you're running losses for tax purposes while you're holding it. However, if you're planning to sell it, the tax consequences could vary and if there has been appreciation then the holding structure could be very relevant.
This isn't tax advice, but just a few ideas that should be discussed with a CPA and attorney. The landscape has got so complex in this area, especially in the last few years, so in my opinion it's a must. Also it's somewhat difficult to answer broad questions about structure without understanding all the facts on your individual circumstances and what you're trying to achieve, as this will certainly play into these decisions.
Hope that helps give some direction.
- Germany · Member since 2019 · 21 posts · 9 votes6y
Thanks so much for the detailed response. My plan is to buy a property here in Germany so I can have better oversight. It will have positive cash flow so all owner expenses, including the mortgage, are covered by rental income. The plan is to rent it out for ten years, at which point German law allows a sale without any capital gains tax, then use the profits to buy more properties. I think depreciation (2% per year of purchase price allowed) will likely exceed net income so I should have paper losses until selling in year 11.
From what I have seen so far, building here are always owned by an LLC (GmbH here). My main purpose to hold it in an entity is to shield myself from personal liability and protect my other assets in case something goes sour, but this is just my initial thought.
- 6yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@John Stanley
There are many things to consider when US citizens operate foreign entities. There are many informational forms that you need to be aware of.
Do you own a foreign corp - you need to file an informational form
Do you own a foreign partnership - you need to file an informational form.
Do you own a foreign disregarded entity - you need to file an information form.
Do you have a bank account with more than $10,000 in USD - you need to file an information form.
Failure to do any of the above results in $$$ penalties.
Basit Siddiqi CPA4.979 Reviews - Germany · Member since 2019 · 21 posts · 9 votes6y
Thanks Bassit. I'm wading through all this now and will eventually have an accountant on both sides of the pond. I already file an FBAR.
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