Tag Archives: FIRPTA

U.S. International Tax Planning for the Canadian and U.K. Investor in U.S. Real Estate

The goal of the U.S. International Tax Planning for the Canadian and U.K. Investor is to a double tax issue.  On one side, there is income tax.  On the other hand, there is inheritance tax (for the U.K. citizen), estate tax in the U.S. (which will be repealed but only for a few years) and the Canadian deemed sale at death tax.

We all want the American 20% long-term capital gain tax rate.  However, this means the foreign investor can’t own the U.S. real estate in a corporation.    Both a domestic corporation and a foreign corporation incur two U.S. income taxes.    For the domestic corporation, the second tax is called “the accumulated earnings and profits tax”.

For the foreign corporation, the tax is called the “branch profits tax”.   Foreign shareholders of a corporation owning U.S.  real estate are subject to the U.S. estate tax (but not the gift tax).

U.S. International Tax Planning for the Canadian and U.K. Investor uses a Nevada Trust

Wealthy Americans have the same tax problem.  They solve the problem by using a special type of a trust.  Here is a short video on reducing U.S. taxes with the use of a trust.   If you want to learn more about a Nevada Self-directed trust for your tax planning, then contact me, Brian Dooley, CPA,MBT  at [email protected]

A Nevada is one of the few states that have a special trust law. It is called a “self-directed” trust. As the name implies, you can direct the trustee.   The IRS has issued favorable rulings on this type of trust. 

Best Foreign Tax Planning for the Foreign Investor Owning United States Real Estate

The best foreign tax planning for the foreign investor owning United States real estate involves the use of an irrevocable trust.

The non-resident alien is faced with many different tax strategies and structures for an investment in U.S. real estate.   Asian and Latin American investors have difficulties because of the American estate and gift tax laws.

Some Western European investors (including those from the United Kingdom) can rely upon the estate and gift tax treaties with the United States.

This blog includes a 45 minute video explaining and diagramming the best international tax structure.  The foreign tax strategy needs to consider FIRPTA, gift taxes and estate taxes. 

Okay, you want a quick and easy answer. But, that is not American tax law.  Our tax law consists of more than 1,000,000 pages of hard to read laws.  Nothing is more complex than income tax. Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year's taxes by increasing next year's taxes.

I know you are smart, but do you think you are smarter than  Albert Einstein

As Donald Trump said, he works very hard to pay the least amount in taxes.  The wealthy know that legally avoiding taxes is hard work. They will invest $1 in professional fees to save $10 in taxes.

“The hardest  thing to understand in the World is the income tax.”   Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes.  At best, it reduces this year’s taxes by increasing next year’s taxes.

This blog’s video contains reference to sections of the Internal Revenue Code that your CPA or attorney will appreciate.  So, please consider sharing the video with him (or her).

If you need help with your international tax issues, then email me, Brian Dooley, CPA, MBT, at [email protected]

U.K.-U.S. Inheritance Tax Planning- Estate Tax Treaty Strategies

U.K.- U.S. Inheritance Tax Planning  starts with your family needs versus saving taxes.   For example,  if you want to preserve your wealth for both your children and great grandchildren, you want a trust that can last for one hundreds years or more.

Such a trust requires a corporate trustee (such as a bank) versus an individual.  The corporate trustee must be a licensed financial institution that you believe will stay in business for 100 years.

The terms of the trust are more complex when the beneficiaries include next generation or generations.  We have seen that children start to demonstrate the real personality and behavior when they become teenagers.  As we watch our children become young adults, we finally learn their long term characteristics.

Because our needs change, we need a trust that we can change.  However, the United Kingdom and the United States inheritance tax and estate tax laws have restrictions on the trust amendments.  The solution is found with the use of an “amendment committee” that satisfies both Inland Revenue and the Internal Revenue Service. 

With your needs and goals in mind, your tax planners will start to draft your trust agreement.  The favorable provisions of the tax treaty provide the framework for your trust. 

One of the biggest international tax planning mistakes, that I have seen in my 40 years of experience, is the client hiring one firm for both the United States and the United Kingdom.

The old saying “Jack of all trades, master of none” applies to international tax planning.

The Best Tax Treaty for Inheritance and Estate Planning is the U.K.-U.S. Tax Treaty

One of my favorite cross border U.K.-U.S. tax plans is found in the tax treaty.  This allows the ownership of a home in the U.S. to avoid the complexity of the “Foreign Investors Real Property Tax Act” (FIRPTA).  Here is what I like:

Ian and Elizabeth are U.K. citizens and domiciles. They own a home in California. Assuming that Ian dies first, his will can provide that the home is inherited by his Elizabeth.  Under the tax treaty,  the U.S. will not charge an estate tax.  Plus, the cost of income taxes is now the market value of the home.

If Elizabeth sells the home after the death of Ian, she will avoid U.S. and California income tax on the appreciation in the value of the home.  The UK-US tax treaty overrides FIRPTA.

The link to the treaty is below.  If you would like a tax planning study then please contact me at [email protected]

  1. UK-US Gift Tax Treaty and UK-US Inheritance Tax Treaty
  2. An article on U.S estate tax for the non-citizen

International Real Estate Planning

International real estate and planning after you buy the property is limited. 

International real estate planning must be done before you purchase the real estate  because a  transfer  (including gifts) of real estate located in the U.S. by a non United States person require a tax deposit with the U.S. Treasury.   

Also, many states have a similar rule. 

For example,  Ian is a non-resident alien to the U.S.  He  forms a Nevada LLC (limited liability company) to purchase real estate in Las Vegas.    He wants to gift the real estate or the LLC to his children.   Before he makes the gift, he must deposit 15% of the value of the real estate with the U.S. Treasury.

Also, Ian owes U.S. gift taxes on the value of the real estate.  His children must file an IRS Form 3520 reporting the receipt of the gift.    Ian must file a U.S. gift tax return.  If, Ian does not pay the gift tax, then the IRS can get the tax from his children.  

If Ian dies owning the real estate, his estate will be the U.S. estate tax.  

International real estate and planning before you buy the property                                                                                                

Before buying real estate in Las Vegas, Ian creates an irrevocable trust.   The trustee of the trust is a licensed bank in Nevada.  The trust agreement provides that Ian will make all of the investment decisions for the trust.[1]  

The beneficiaries of the trust are Ian and his children.    When the trust is created, Ian gifts money into the trust.  The money in the trust is used to purchase the real estate.  

And that is the whole story.  Assuming the trust agreement has some special clauses required by the IRS to avoid estate taxes, Ian has nothing more to do.  

When he passes away, his children can continue the trust or the trust can transfer the property to the children with any gift or estate taxes.  

International real estate planning for collecting rent  

Ian’s Las Vegas property is commercial property.   He rent the property on a triple net lease (which means the tenant pays all of the expenses except property taxes and debt service.  

If Ian or his Nevada LLC owns the property, then the tenant will withhold 30% of the rent and pay the amount withhold to the U.S. Treasury.[2]  However, if Ian makes an election and provides his tenant with a IRS Form W-8,  then the tenant does not withhold the 30%.  

International real estate planning for the sale of the property.   

The sale of real property located in the United States by a non-resident alien is governed by section 897 (on this link)

My first hope for you, is that a  corporation does not own the real estate.   The low long term capital gain tax rate (approximately 20%) does not apply to a corporation.  

For example, Ian’s Nevada LLC owns the property.  He has a buyer.  If he moves quickly, he can reduce the amount withheld (15% of the sales price) and paid to the U.S. Treasury. 

You can learn more about the procedure and other International Real Estate Planning on this link. 

After the property is sold, Ian must file a Form 1040NR and report the gain.  If his tax liability exceeds the amount withheld, he owes the IRS money.

If his tax liability is less than the amount withheld, he is entitled to a refund.

If you would like to discuss your international real estate planning, then please either email me, Brian Dooley, CPA, MBT at [email protected]

Footnotes

[1] The IRS has many rulings on a Nevada Self-directed trust.

[2] Section 871 and section 1441 of the tax code

How to Prepare Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288, form 8288-b

Preparing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

The non-resident alien, foreign LLC and foreign corporations all have one common international tax problem- the U.S. 15% real estate sale price withholding tax.

Additionally, states have a  withholding tax.

For example, Hawaii is a five percent withholding tax of the sales price.  As a result, a whooping 20% of the sales price is withheld.

The seller is personally responsible for this tax and so is the escrow company or law firm handling the sale.   It is what we call, in America, as a “hot potato”.   Every person connected with the sale proceeds is personally responsible.

I am sorry.  I have more bad news about Form 8288-B FIRPTA Certificate.  Congress slashed funding for the IRS.  The other day, an IRS International Tax Attorney told me that the IRS has “limited resources”.   This means a longer, much longer, wait for your FIRPTA Certificate   (click here to learn how to get a fast refund of the tax). 

Continue reading