All Forum Posts by: Paul Sundin

Michael - 

As a CPA who works extensively with foreign real estate investors, there are three main US tax issues that foreign investors need to be aware of are: (1) income tax; (2) estate tax; and (3) gift tax. Some of these issues are rather straightforward, but depending on your tax situation there may be entity structures that you can implement that will make your investments more effective and tax efficient.

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.

As it relates to double taxation, as a general rule investors are taxed in the US and then taxed in their home country.  But typically they are given a credit back for taxed paid in the US in order to avoid double taxation.  But each country is different.  Hope this helps.

You are correct that you need to have earned income in order to contribute to a 401k. But without knowing anything about your tax bracket, why not just contribute to a Roth IRA?

The answer is yes.  When you have passive rental real estate losses that you cannot use in a given year then you can carry forward those losses to future years where they can be used to offset passive income generated, including income generated from other properties.

@Fred Heller @Steve Might I don't think that paying yourself a salary of $10k and taking distributions of $50k is necessarily wrong or a red flag.  It depends on the situation.

For example, if there was a flipper who did one deal and made $100k in a month or two and did nothing else the rest of the year they could make an argument for paying themselves $10k in salary and $90k in distributions.  It all comes down to whether the salary is reasonable compensation in light of the work performed.

I defended a flipper in an IRS audit and I did NOT prepare his original tax return.  He paid himself $18k in wages and took approx $100k in distributions.  I won the case, but I wouldn't have recommended that he take such a low salary.

Just make sure that you review your situation with your CPA.

Unfortunately you probably do not qualify.  One of the qualifications is that more than half of all the personal service hours you perform during the year were performed in real property trades or activities in which you materially participated. What this essentially means is that you must have worked more in your real estate trade activities than you did in any other job.

My guess is that you may work 40 hours a week in your day job, so you will have to work 41 hours in your real estate activities.  Sounds like tax season hours to me.

If you are for example a flipper who has earned income and no employees then a solo 401k can be a great option.  For 2015 you can put $18,000 in as an employee deferral and you can also do a profit sharing match.  It is a great vehical for many folks.

@Phil Hong

I agree that many of the larger CPA firms and real estate CPAs may throw you off on a junior accountant.  Since it appears that you are starting out, you may be well suited with a smaller firm or just a sole proprietor CPA who will take more time with you.  They just might not have a lot of real estate expertise.  But at some point you can graduate to a larger firm once you need more advanced tax planning.  You just need to check around.

I agree that rates for QIs I have dealt with typically start around $900 and then they charge a couple hundred dollars extra for each property in the exchange.  So make sure to shop around.

1031s are great vehicles, but there is a cost and headache factor.  As a result, if a client has a small gain I sometimes recommend just paying the tax.  It just depends on the situation.

I would rarely recommend a C-Corp for a new real estate flipper/developer.  While the C-Corp offers certain benefits, it is a little more complex to administer and if not used correctly can result in unexpected tax consequences.  I would usually recommend it in the following situations:

1) Since the first $50k is only taxed at 15% it is used as a "carve-out" in conjunction with an S-Corp

2) Foreign real estate investors who are concerned with estate taxes

3) Someone in need of significant fringe benefits (high medical costs, etc)

4) A large number of shareholders who do not want to mess with K1s and passive loss limitations

Please realize that C-Corps are rarely good for your buy and holds.  There are many reasons for this, but one significant reason is that they are not afforded favorable long term capital gains rates.

@Fred Heller

You are correct that a corporation starts out as a C-Corp and you need to elect to be taxed as an S-Corp before the deadline.  But if you miss the deadline the IRS allows a late election for a variety of reasons.  I have probably filed 200 late elections over the years and can only remember 1 being rejected.