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Firpta

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This document discusses investing in US real estate by foreign individuals and provides an overview of key tax considerations. It notes that income tax rates vary by state from 10-39.6% for individuals and 15-38% for corporations. Capital gains tax is generally 15% but may increase to 20% for higher income brackets. Sale of real property by a foreign person may require FIRPTA compliance. Estate tax exclusion is $5.34M for US persons but only $60K for foreign persons. The simplest ownership structure is direct ownership by a foreign individual but this is subject to FIRPTA withholding and estate tax. The recommended structure uses a foreign corporation and US corporation to avoid these issues but is more expensive. FIRP

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Investing in US Real Estate PRESENTED BY: Federico Bregni, CPA
To have in mind when investing in the US  Income tax: Federal rates vary from 10% to 39.6% on a personal level, and 15% to 38% on corporate level under the current law. Each state has different rates.  Capital gains tax: Generally 15% of the difference between adjusted basis and sales price (may increase to 20% if in higher bracket).  Sale of real property by a foreign person may require FIRPTA compliance  Estate tax (“Death tax”): Escalates quickly to 40%. Exclusion for U.S. persons: $5,340,000. Exclusion for foreign persons: $60,000.
Tax consequences of different ownership structures Foreign Individual US Real Estate 100%Simplest model
Tax consequences of different ownership structures – SIMPLEST MODEL PROS CONS Most economical way of managing properties in the U.S. Subject to FIRPTA withholding (10% of sales price of property) unless exempt No extra fees, no annual report, no corporate tax return Subject to short term capital gains if not held for more than 1 year Capital Gain is capped at 15% if property is held for longer than 1 year (20% if subject to highest income tax rate) Exposure to estate tax on FV of property at date of death (Exclusion of $60,000 per foreign person) – Might mitigate with more investors and life insurance
Example  Person purchases a property under their name for $1,500,000  The next day, the person passes away: U.S Person Foreign Person Fair Market Value of Property $ 1,500,000 $ 1,500,000 Exclusion (1,500,000) (60,000) Subject to estate tax 0 1,440,000 Estate tax (40% marginal rate) $ 0 $ (521,800)
Tax consequences of different ownership structures Recommended model Foreign Corporation Foreign Individual US Real Estate 100% 100% US Corporation
Tax consequences of different ownership structures – RECOMMENDED MODEL PROS CONS Avoid FIRPTA withholding of 10% of sales price because of U.S. Corp. Expensive (need to file more tax returns, subject to more fees) Avoid estate tax (“death tax”) exposure. Upon death of foreign owner, shares of offshore corp. can be transferred No capital gain treatment for corporations (Any gain is taxed at corporate income tax rates) Avoid 30% tax on dividends (Branch Profit Tax) from U.S. Corp to Foreign Corp if liquidated (Caveat: Foreign Corp. cannot do business in U.S. for 3 years) Could be subject to double taxation (if not liquidated)
Example  Person purchases a property under their name for $1,500,000  The next day, the person passes away: U.S Person Foreign Person Fair Market Value of Property $ 1,500,000 $ 1,500,000 Exclusion (1,500,000) (60,000) Subject to estate tax 0 1,440,000 Estate tax (40% marginal rate) $ 0 $ (521,800) Average cost of Foreign Corporation structures: $3,000 per year. You can live 174 years and still save money!
Introduction to FIRPTA  Foreign persons, which include non-resident, non-citizen individuals and non- U.S. corporations, are taxed only on certain items of income, including effectively-connected income and certain US source income.  These non-resident aliens (NRA) are generally exempt from paying taxes on capital gains in the US.  Prior to 1981, this included US capital gains tax on the sale of real-estate in the United States.
FIRPTA – An Overview  Congress passed the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  Purpose: to ensure tax collection from foreign taxpayers that choose to transfer, dispose, or sell real property interest in the United States (USRPI).  Effect: all persons, foreign and domestic, are subject to income tax on disposition of real property.  Internal Revenue Code section 897: the gain on a disposition of real property is treated as effectively-connected income.  NOTE: There are certain exceptions and non-recognition exchanges that may deem a transaction of USPRI excluded from triggering FIRPTA.
Exceptions from FIRPTA Withholding (Derived from IRS.gov) Generally you do not have to withhold in the following situations; however, notification requirements must be met: 1. You (the transferee) acquire the property for use as a home and the amount realized (generally sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. 2. The property disposed of (other than certain dispositions of nonpublicly traded interests) is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, if the class of stock had been held by a foreign person who beneficially owned more than 5% of the fair market value of that class at any time during the previous 5-year period, then that interest is a U.S. real property interest if the corporation qualifies as a United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition. 3. The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. Generally, the corporation can make this certification only if the corporation was not a USRPHC during the previous 5 years (or, if shorter, the period the interest was held by its present owner), or as of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Internal Revenue Code. The certification must be dated not more than 30 days before the date of transfer. 4. The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor's name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity). 5. You receive a withholding certificate from the Internal Revenue Service that excuses withholding. Refer to Withholding Certificates. 6. The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the:  Internal Revenue Service Center P.O. Box 409101 Ogden, UT 84409. 7. The amount the transferor realizes on the transfer of a U.S. real property interest is zero. 8. The property is acquired by the United States, a U.S. state or possession, a political subdivision thereof, or the District of Columbia. 9. The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option. 10. The disposition (other than certain dispositions of nonpublicly traded interests) is of publicly traded partnerships or trusts. However, if an interest in a publicly traded partnership or trust was owned by a foreign person with a greater than 5% interest at any time during the previous 5-year period, then that interest is a U.S. real property interest if the partnership or trust would otherwise qualify as a USRPHC if it were a corporation, and you must withhold on it.
FIRPTA Withholding  Buyer of USRPI required to withhold 10% of the gross sales price and submit it to the IRS unless it can be proved that:  The gross sales price is under $300,000  The buyer of the property will use the property as a primary residence for a period greater than half a year.  Penalties to buyer who fails to withhold, file Form 8288 with the IRS, or pay the required withholding within 20 days of the sale.  Seller may request a withholding certificate issued by the IRS to reduce the withholding amount payable to the IRS.  File Form 8288-B no later than the closing date of the sale or transfer  Process takes 90 to 120 days.
FIRPTA Withholding Determination If: Appropriate form: Who files: Reason: Capital gain tax liability is incurred on the sale/transfer of the property Form 8288 Form 8288-A Transferee (buyer) To send a portion or the entirety of FIRPTA withholding to the IRS Required withholding > CG tax liability Form 8288-B Transferor (seller) To request a certification of withholding from the IRS FMV of US property 10% FMV = Required withholding Less: Adjusted basis Capital gain 20% Capital gain = CG tax liability
In conclusion…  Different Tax Consequences (Income Tax, Capital Gains, Estate Tax)  Different Organizational Structures (Simplest vs. Recommended)  FIRPTA compliance
Questions? Comments? Thank you for your time!

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Firpta

  • 1. Investing in US Real Estate PRESENTED BY: Federico Bregni, CPA
  • 2. To have in mind when investing in the US  Income tax: Federal rates vary from 10% to 39.6% on a personal level, and 15% to 38% on corporate level under the current law. Each state has different rates.  Capital gains tax: Generally 15% of the difference between adjusted basis and sales price (may increase to 20% if in higher bracket).  Sale of real property by a foreign person may require FIRPTA compliance  Estate tax (“Death tax”): Escalates quickly to 40%. Exclusion for U.S. persons: $5,340,000. Exclusion for foreign persons: $60,000.
  • 3. Tax consequences of different ownership structures Foreign Individual US Real Estate 100%Simplest model
  • 4. Tax consequences of different ownership structures – SIMPLEST MODEL PROS CONS Most economical way of managing properties in the U.S. Subject to FIRPTA withholding (10% of sales price of property) unless exempt No extra fees, no annual report, no corporate tax return Subject to short term capital gains if not held for more than 1 year Capital Gain is capped at 15% if property is held for longer than 1 year (20% if subject to highest income tax rate) Exposure to estate tax on FV of property at date of death (Exclusion of $60,000 per foreign person) – Might mitigate with more investors and life insurance
  • 5. Example  Person purchases a property under their name for $1,500,000  The next day, the person passes away: U.S Person Foreign Person Fair Market Value of Property $ 1,500,000 $ 1,500,000 Exclusion (1,500,000) (60,000) Subject to estate tax 0 1,440,000 Estate tax (40% marginal rate) $ 0 $ (521,800)
  • 6. Tax consequences of different ownership structures Recommended model Foreign Corporation Foreign Individual US Real Estate 100% 100% US Corporation
  • 7. Tax consequences of different ownership structures – RECOMMENDED MODEL PROS CONS Avoid FIRPTA withholding of 10% of sales price because of U.S. Corp. Expensive (need to file more tax returns, subject to more fees) Avoid estate tax (“death tax”) exposure. Upon death of foreign owner, shares of offshore corp. can be transferred No capital gain treatment for corporations (Any gain is taxed at corporate income tax rates) Avoid 30% tax on dividends (Branch Profit Tax) from U.S. Corp to Foreign Corp if liquidated (Caveat: Foreign Corp. cannot do business in U.S. for 3 years) Could be subject to double taxation (if not liquidated)
  • 8. Example  Person purchases a property under their name for $1,500,000  The next day, the person passes away: U.S Person Foreign Person Fair Market Value of Property $ 1,500,000 $ 1,500,000 Exclusion (1,500,000) (60,000) Subject to estate tax 0 1,440,000 Estate tax (40% marginal rate) $ 0 $ (521,800) Average cost of Foreign Corporation structures: $3,000 per year. You can live 174 years and still save money!
  • 9. Introduction to FIRPTA  Foreign persons, which include non-resident, non-citizen individuals and non- U.S. corporations, are taxed only on certain items of income, including effectively-connected income and certain US source income.  These non-resident aliens (NRA) are generally exempt from paying taxes on capital gains in the US.  Prior to 1981, this included US capital gains tax on the sale of real-estate in the United States.
  • 10. FIRPTA – An Overview  Congress passed the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  Purpose: to ensure tax collection from foreign taxpayers that choose to transfer, dispose, or sell real property interest in the United States (USRPI).  Effect: all persons, foreign and domestic, are subject to income tax on disposition of real property.  Internal Revenue Code section 897: the gain on a disposition of real property is treated as effectively-connected income.  NOTE: There are certain exceptions and non-recognition exchanges that may deem a transaction of USPRI excluded from triggering FIRPTA.
  • 11. Exceptions from FIRPTA Withholding (Derived from IRS.gov) Generally you do not have to withhold in the following situations; however, notification requirements must be met: 1. You (the transferee) acquire the property for use as a home and the amount realized (generally sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. 2. The property disposed of (other than certain dispositions of nonpublicly traded interests) is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, if the class of stock had been held by a foreign person who beneficially owned more than 5% of the fair market value of that class at any time during the previous 5-year period, then that interest is a U.S. real property interest if the corporation qualifies as a United States Real Property Holding Corporation (USRPHC), and you must withhold on any disposition. 3. The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under penalties of perjury, that the interest is not a U.S. real property interest. Generally, the corporation can make this certification only if the corporation was not a USRPHC during the previous 5 years (or, if shorter, the period the interest was held by its present owner), or as of the date of disposition, the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Internal Revenue Code. The certification must be dated not more than 30 days before the date of transfer. 4. The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person and containing the transferor's name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity). 5. You receive a withholding certificate from the Internal Revenue Service that excuses withholding. Refer to Withholding Certificates. 6. The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th day after the date of transfer with the:  Internal Revenue Service Center P.O. Box 409101 Ogden, UT 84409. 7. The amount the transferor realizes on the transfer of a U.S. real property interest is zero. 8. The property is acquired by the United States, a U.S. state or possession, a political subdivision thereof, or the District of Columbia. 9. The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must withhold on the sale, exchange, or exercise of that option. 10. The disposition (other than certain dispositions of nonpublicly traded interests) is of publicly traded partnerships or trusts. However, if an interest in a publicly traded partnership or trust was owned by a foreign person with a greater than 5% interest at any time during the previous 5-year period, then that interest is a U.S. real property interest if the partnership or trust would otherwise qualify as a USRPHC if it were a corporation, and you must withhold on it.
  • 12. FIRPTA Withholding  Buyer of USRPI required to withhold 10% of the gross sales price and submit it to the IRS unless it can be proved that:  The gross sales price is under $300,000  The buyer of the property will use the property as a primary residence for a period greater than half a year.  Penalties to buyer who fails to withhold, file Form 8288 with the IRS, or pay the required withholding within 20 days of the sale.  Seller may request a withholding certificate issued by the IRS to reduce the withholding amount payable to the IRS.  File Form 8288-B no later than the closing date of the sale or transfer  Process takes 90 to 120 days.
  • 13. FIRPTA Withholding Determination If: Appropriate form: Who files: Reason: Capital gain tax liability is incurred on the sale/transfer of the property Form 8288 Form 8288-A Transferee (buyer) To send a portion or the entirety of FIRPTA withholding to the IRS Required withholding > CG tax liability Form 8288-B Transferor (seller) To request a certification of withholding from the IRS FMV of US property 10% FMV = Required withholding Less: Adjusted basis Capital gain 20% Capital gain = CG tax liability
  • 14. In conclusion…  Different Tax Consequences (Income Tax, Capital Gains, Estate Tax)  Different Organizational Structures (Simplest vs. Recommended)  FIRPTA compliance