I have some foreign investors that are looking to invest in some real estate in Washington, would someone be able to provide me some insight as to how they would accomplish this and the tax implication they might have should they want to purchase more property in the future?
Their first purchase would be cash so would all they need to buy be that they form a US LLC and transfer funds into that LLC?
Any help is appreciated!
There are several things they will need to consider. They will need to get a U.S. ITIN. They of course need to consider tax implications. The three main US tax issues that foreign investors need to be aware of are: (1) income tax; (2) estate tax; and (3) gift tax.
Many foreign investors will find themselves being assessed tax at the same rates as US individuals. These rates begin at 10% and go up to the highest rate of 39.6%. Rental real estate will often generate depreciation expense and other direct expenses, so most investors will only pay rates at the lowest level of 10% (if they pay tax at all). The US tax code also has a very favorable long-term capital gains rate of 15% (subject to certain income) that may apply upon the sale or disposition of the property.
In addition to federal taxes, investors will also have state taxes to consider. The US has of course 50 states, but only 43 have a state income tax. But some states impose a transfer tax and other assessments that can complicate the situation. Navigating state tax law and filing the applicable tax returns is certainly not easy.
I hope this helps.
Hi @Riley Kuranishi ,
@Paul Sundin , CPA is right on the money (pun intended), especially by suggesting that they apply for a taxpayer identification number upfront. This will also help the foreign investor at the back and when it is time to sell. It can be significantly more complicated when they go to sell if they have not already applied for and received their taxpayer identification number.
I would also suggest that they discuss their exit strategy in advance. Exit strategies can be more complicated with foreign investors. They will likely be required to comply with FiRPTA withholding requirements, which can significantly complicate a 1031 Exchange transaction should that be there exit strategy.
Adding foreign investors into the equation definitely adds some complexity.
A lot of foreign investors do not want the extra burden of having to file a tax return.
forming an LLC(or any partnership entity) with the foreign investors as direct partners in the partnership entity will require the foreign investors to file for an ITIN(mentioned above) and it will also require that the partnership withhold taxes inbehalf of the foreign investors and remit it to the IRS.
Failure to do so would result in the partnership paying any tax in behalf of the foreign investor if he fails to file a US tax return.
In large deals - I see a lot of foreign investors pool money inside of a corporation where the corporation invests the money into the partnership. This avoids many of the headaches described above but does have the additional filing requirement of a corporation return.
@Paul Sundin , CPA
Thanks guys for the info! Do they have to register to get an ITIN before they buy the property? Or can they do it afterward? They plan to hold it long term as a rental, so they would have some time before it came time to sell.
Do you know of the current advantages/disadvantages of them buying all cash through themselves as an individual vs. them creating a US LLC?
Thank you, thank you! I believe their exit strategy would ultimately be an appreciation play, where they sell and buy more properties in the future. Due to the new FIRPTA requirements, do you know what this would entail and how they would go about doing this?
Thanks again everyone!
Hi @Riley Kuranishi ,
Yes, we can be of assistance in structuring the 1031 Exchange transaction and helping you and your clients through the FIRPTA process. There will be legal fees involved in properly navigating the FIRPTA issues, but we will also help you through the process.
Generally, they would have to apply for the ITIN before they are ready to consider the sale of their relinquished property (ideally), and then they would file for a Certificate of Exemption, which can take up to 90 days and now requires that a copy of the purchase and sale agreements or the relinquished property and the replacement property be attached.
They don't have to do anything, in particular, to get them ready for the purchase though right? If they're just paying cash they can purchase it like anybody else could?
I like plain old vanilla deals.
When you start adding in foreign money or local guys with retirement funds it makes things more complex.
I like people here in the states that just have money sitting around ready to put to work with no strings attached. For me to deal with a foreign buyer they would have to buy a very large property in the 10 plus million range. I find often they do not perform enough due diligence on with holding,taxes,etc. and the deal falls apart mid process.
Hi @Riley Kuranishi ,
Correct, the initial purchase is just an outright purchase. There is nothing they need to do at that point in time for 1031 Exchange purposes.
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