Tag Archives: FIRPTA

U.S.-U.K. Inheritance Planning-an-update on Estate Tax Treaty

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

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

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 blogs 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).

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

Canadian and the United Kingdom citizens are caught in 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).

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 please call me, Brian Dooley, CPA, at 949-939-3414.

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). 

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IRS Rescues Non-Resident Alien Owning U.S. Real Estate and Residences

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

The British Virgin Island (BVI) corporation is used by many non-residents aliens  (NRA) to own real estate and their personal residences in the U.S.

When the property is sold, an excessive tax is paid.   Instead of being taxed at 15% to 20%, the corporate income tax rate is 35%.  After paying the corporate income tax, a foreign corporation also pays the branch profits tax.  This tax is 30% of the net income.

Removing  the real estate from the corporation caused a “double taxation”.    A corporate (domestic or foreign) distribution of  property is taxed as if the corporation sold the property.  Second, when the shareholder receives the property, he or she is taxed as if they have received a dividend.

Estate Tax for the Non-Resident Alien owning U.S. property with a Foreign Corporation.

About 15 years ago, the IRS won estate tax cases using section 2036.  This law puts assets of a foreign corporation in the alien’s taxable estate if he can enjoy the corporate property or  the corporate income.    Since the estate tax exemption for the non-resident alien is $60,000 or less, a large estate tax is due.

Because of the foreign corporation owns the real estate,  the corporate income taxes described in the first paragraph can apply either in whole or in part.

The IRS has come up with a method to solve the income tax problems.   The method is called a “dual resident corporation.”

A dual resident corporation has two corporate charters.  One charter is issued by a foreign government.  The other charter is issued by a State.  For example, a BVI corporation owns a home.   The corporate files for a charter to be a Delaware corporation.  The corporation now has two corporate charters.

The IRS allows such a corporation (if owned by Americans and residents) to elect the be taxed under Subchapter S.  Thus, any gain on the sale of the property is taxed by the individual shareholders at the 15% or 20%  long-term capital gain rate.

The foreign corporation branch profits tax does not apply because the corporation has two corporate charters (one of which is American).

Once Caveat:  A foreign corporation converted to a Subchapter S corporation has to wait 7 years to sell its appreciated property to avoid the double taxation discussed in the first paragraph.

However, the double taxation applies only to the amount of appreciation of the real estate (also known as “built-in gain”) at the time of converting to an S-corporation.   For example, the BVI corporation purchased a home for $100,000.  A few years later it becomes an S-corporation.  At that time the home is worth $200,000.  A few years later, the home is sold for $400,000.

The gain of $300,000 is a long-term capital gain.  An additional tax is charged on the gain of $100,000 ($200,000 minus the cost of $100,000).

One of the hidden savings of the dual resident corporation is the low cost of a domestic tax return.  A foreign corporation owning U.S. real estate must file a complicated Form 1120F.  The cost of preparing a Form 1120F is three to four times the cost of a domestic corporation tax return.    In additionally, a foreign corporation has special reporting because of a tax law known is the Foreign Investor Real Property Tax Act (FIRPTA).