foreigner investing in U.S, what are the tax issues?

Question

Hello everyone,

I'm thinking of investing in the U.S for the next 10 years. It will span from SFR to Multi-family to even commercial in the future; and will mainly be buy-hold-rent.  I don't have legal resident in the U.S so mostly will be doing this from overseas.

So I'd like to think ahead and know how I should work this plan in terms of tax and legal issues. I read on the IRS that if one opens a LLC and fill a form then the withholding limit doesn't apply. But maybe there other potential troubling issues with LLC.

If any foreign investor here or anyone who had worked with a foreign investor could advice on this? thanks.

Deidra Hubenak · Answer

I am an international tax attorney and a CPA as well as a real estate investor myself.  LLC's may or may not qualify for an exception to the FIRPTA withholding requirements depending on whether they are taxed as a corporation, a partnership or a disregarded entity.  The analysis is very complex and you should definitely seek the advice of an international tax attorney.

Steven Hamilton II · Answer

Vivian,

That is not true. There may be required withholding from the gross total. IF you have a business partner here, then only your share would be subject to excess withholding. 
	
	You may find with a pass through entity that you are subject to a higher tax rate than you would be if you used a corporation.

What country are you a citizen/resident of?  Also, How much will you be investing?  There are certain exemptions such as a visa allowed for foreigners who invest $1 million or more.

-Steven

Ali Boone · Answer

I highly highly HIGHLY encourage you to work with a professional who is versed in entity and tax structuring for internationals buying US real estate. None of it is hard, but if it isn't set up just right you could end up suffering mega tax consequences. I would say that it would be almost impossible to know exactly how to set it up just right yourself. Go with a pro!

I've worked with a lot of international investors and it's all very easy to do, just need to do it right.

Joel Owens · Answer

Also I forgot to mention some lenders will require a local partner on the loan as they want someone with boots on the ground they can talk to who is actively around the property.

Joel Owens · Answer

When getting a loan in the U.S some countries you do not have to file taxes so lenders will require other sources of verification.

Money laundering is also a big thing as the lenders will want to money sourced to make sure it is not linked to any terrorist or illegal activity.

When my foreign clients are looking at commercial real estate and multifamily in the U.S. one of the downsides is that the investor needs a bunch of time to analyze a deal versus someone who is local and knows the areas. Sometimes not asking fast enough can make a buyer lose out on a deal. That is why it is critical to have people where you want to purchase with great knowledge of the area top advise on what the opportunity looks like.

Of course you need to see the property and perform due diligence but some sellers and listing brokers on the commercial side will not even put anything under contract until the outside investor has seen the area. They do not want to tie up the property for a long time especially if the seller is wanting to close by years end to 1031 into a tax advantaged program etc.

CK Hwang · Answer

Hi Vivian,

I do work with foreign investors quite in a bit...actually, all my investors are foreign to think of it. As far as tax issue go, there really isn't any other than the fact that some deductions aren't available. However, some of your investors might come from countries with free trade agreements that provides certain tax benefits that are specific to the country.

As far as tax filing goes, it's fairly simple, most CPAs can do that for a fairly low fee since they will likely be filing the EZ form if their only source of income is from the rental property. There is the issue of FIRPTA, but as you had mentioned, if the property is held under a LLC, then it does not apply.

Keep in mind though, it is harder to get a loan as an LLC. As a foreigner owning a LLC, it's really really hard to get a loan if not impossible. I'm not sure where you're from, but generally, my investors find it cheaper to borrow money from outside the USA.

If you had more specific questions, I might be able to help answer them based on my experience. Otherwise, just spending a couple of hundred dollars for an hour of an international tax attorney's time is also fairly useful, which is what I did to get going.

Dawn Anastasi · Answer

@Vivian C

I don't know the foreign investor issues off hand however I do know there have been others on the forums who have done it.  Maybe one of them can chime in?