I will be bringing in capital from outside the US and will be using this money to form an LLC in Florida to buy, flip and rent/sell the properties. The LLC will be setup under 3 partners (1 US citizen, and 2 foreign investors). I am wondering what will be the tax implications on the money coming in? Also I am writing so see if anyone has gone through this process or one similar and can offer any insight or tips. From reading I understand that the foreign partners will need an ITIN. Can anyone elaborate on the taxes/situation for foreign partners and/or add any suggestions, help for the process it would be greatly appreciated.
If a LLC is formed with more than one members, it defaults into a partnership for tax purposes, unless you make an affirmative check the box election (using a form 8832) to treat the LLC as a C corporation. It may not be advisable to "mix" US and foreign investors in the same LLC, because as a US taxpayer, one might prefer flow through treatment, however, as a foreign taxpayer, flow through may give rise to much complexities such as partnership withholding, etc. If the deal is material, highly suggest reaching out to a qualified tax CPA or attorney.
Hi @Fran OBrien I looked into something similar to this to purchase a property with an investor from Israel. I wasn't successful in getting it done before the deal expired. This was the story...
I found a property in a B-Class area that needed quite a bit of TLC. I believed the house would sell for about $110,000 CASH. My problem was I didn't have that kind of money.
The property needed about $23,500 in renovations.
The estimated ARV was about $163,000.
We would have about $30,000 in equity and the property would rent for at least $1,200/month.
Our initial plan was to form an LLC together. My foreign partner would put down the $135,000 initial investment. I would cover soft costs, manage the project and manage the property. In exchange I would be given a substantial equity share and a share of the cash flow.
After 6-9 months we would refinance the property (4.5% at the time) and pull out 75% of the appraised value which would give us back about $122,000. This would leave us with about $10,000 in the deal.
With rent at $1,200/month we calculated about $2,400/year after expenses leaving us with a return of about 22% COC.
The problem we faced was that the bank wouldn't give us a cash out refinance for an LLC.
Our first thought was we could buy it in my personal name and do a quit claim to the LLC.
This too was shot down because we were told that the mortgage company could call the loan if we deeded the property to an LLC.
At this point we were researching other options and the property sold.
I've been told afterwards that one strategy we could have used was to purchase the property in a trust with myself as the trustee. We would form a shared LLC and after getting the refinance we could change the trustee to the LLC. This wouldn't trigger the mortgage company because from their side the ownership hasn't changed. It is still owned by the same trust. The only thing that changed is the control.
At this point that is the best option I have but our problem is more for financing.
Hi @Tony Wu , Thank you for the advice. I have reached out to a tax CPA and a real estate lawyer. Unfortunately at the moment the US and the investors country (Chile) does not have a double taxation treaty signed. It is in the process and hopefully will be approved at some point in the near future. The problem is that it is being held in the US Senate. The attorney had advised that the flow through from the LLC would be the best option when involving foreign investors.
Hi @Joseph Hamaoui, Thanks a lot for sharing your experience. Yes we are in the process of setting up the LLC. Our initial capital would be between 500k-1m, so I think we would be ok with financing options. Why wouldnt the bank let you do a cash out refinance?
That is interesting about putting it into a trust in your name and then transferring it into an LLC.
In my situation, the foreign partners will be providing all of the capital and I will have an equity % and cash flow % of the properties.
Can you elaborate on how your foreign investor from Israel was going to contribute the capital? I am looking into tax implications on capital coming into the country from foreign investors. From what I have read and speaking to a CPA, the system in place is beneficial if the business (LLC) is going to be having employees.
Appreciate the feedback.
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