How The Tax Reform Is Good For Foreign Investors In U.S. Real Estate
The Tax Cuts and Jobs Act (TCJA) that was enacted in December has changed the way foreign investors structure their investments and plan for taxes. Before the enactment, there was a lower individual and trust tax rate in place. Howard Wagner, CPA had some insights on what this means for foreign investors in his article that was posted on thetaxadviser.com.
The TCJA has given a huge benefit to foreign investors by dropping the corporate tax rate from 35% to 21%. This change applies to all U.S. corporations and it doesn’t matter if the owners are foreign or domestic. This has opened up a fantastic opportunity for foreign investors to restructure the way their U.S. properties are held to get in some cases up to 16% lower tax rates which will help minimize tax burdens and maximize profits. Many owners are changing from a trust or direct ownership structure to a corporate one tax-free before they are completing the sale in question. It makes more sense now to set things up in a corporate ownership structure instead of a pass through structure which has traditionally been the preferred route even though there was significant cost and complexity to set up the pass through structure.
There are several reasons why a corporate ownership structure now makes more sense:
- Lower corporate tax rates due to TCJA. Foreign individuals or trust owners are taxed at 37% for development gains. When structured as a corporation the top tax rate will be 21%
- Individual and trusts are still charged 20% capital games for nonresidents
- There is a new $10,000 cap on federal deductions for state taxes which can hurt a foreign owners tax return but the state taxes are still deductible on a corporations federal tax return which can make a huge difference for foreign owners who own property in high-tax states
- S. corporation set up costs are minimal compared to complex pass through partnership or trust structures
- Corporations have fewer ongoing costs and fewer tax filings when you figure that they won’t have to also file an individual tax return
- Using a U.S. corporation for property ownership can eliminate complicated disclosure requirements for foreign investors. The foreign owner or trust will also not have to apply for a U.S. tax identification number (TIN), but traditional pass through structures still require the foreign owner to obtain a TIN
- One of the HUGE benefits to using a U.S. corporation structure is that you can avoid the 10% withholding that is required when a foreign owner sells a U.S. property in traditional structures. Owners are better able maximize their profits and the buyer doesn’t have to be hassled with withholding and reporting to the IRS
- Gifting exemptions are better for a U.S. corporation structure. Gifting stock in a corporation can eliminate the gift tax where as there is only a $15,000 exemption for a foreign owners gift of tangible property in the U.S. Intangible property is generally exempt. Stock in a corporation is considered intangible property
- Foreign owners of property in the U.S. that move their property into a U.S. corporation will significantly simplify the estate planning process. In some cases exposure to the estate tax can be avoided all together when property planned and structured. Estate taxes can range from 18-40% for properties over $60,000 in value. Putting the property in a U.S. corporation can save a lot in planning headaches and money paid in estate tax
- There are long standing statutes that will allow a foreign person to transfer their property into a U.S. corporation tax-free even if there are substantial gains on the property. If the property is sold and the corporation is liquidated in the same year, the proceeds can be distributed without having to worry about dividend withholding taxes or second level branch profits
Putting foreign owned interests in U.S. properties in a U.S. corporation instead of an LLC or partnership will absolutely lower the tax rate and simplify the filing procedures for the owners. There are many reasons it makes a lot of sense to make this change now instead of holding out for further changes. U.S. corporations will pay a 21% tax rate, which has been dropped from 35% and has created a massive opportunity for foreign investors to maximize profits and simplify the process. Obviously this will be dependent on individual circumstances and this structure may not be right for everyone. Check with an experienced tax adviser to figure out what structure will ultimately be right for the situation at hand because these tax codes can be challenging to navigate if you aren’t sure what you are doing. Professionals are educated, knowledgeable and helpful in walking through the differing variations of dealing with inevitable taxes for both U.S. and foreign investors.
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