We recently wrote a post discussing how foreign investors have jumped into New York City’s real estate market, notably after the market underwent a severe correction in 2008. However, several distinct advantages have kept international buyers in the market. These include the ability to quickly purchase property, a favorable foreign currency exchange rate, our growing economy along with a stable political system, along with the belief that prices, including those in NYC, remain attractive despite the recent run-up.
Therefore, we feel it is beneficial to introduce an important concept for foreign citizens that are considering an investment in our real estate market. Those seeking a more detailed and technical treatment on the subject can consult a paper titled “Foreign Ownership of U.S. Real Property” by Charles Perkins, CPA.
Although this may appear to be a simple matter, the choice can have a profound impact on an investor’s taxes, along with legal liability. It is important to give this serious thought before making an investment since changing it after can take some time and result in additional expenses. Also, it may result in an unnecessary tax burden. There is a myriad of structures. We will run through some of the basis ones.
The most obvious one is direct ownership. One advantage is the simplicity. An investor does not need to consult a lawyer to form a corporate or partnership structure. Second, there are potential tax advantages, including a favorable capital gains treatment. Third, it offers transparency, which sellers may like to see, along with the IRS. As for the disadvantages, direct ownership requires the filing of an income tax return and may be subject to estate taxes down the road. There may also be a personal liability that could be limited from a corporate or LLC structure.
Investors can also own real property through a foreign corporation. This usually means any gain upon the sale is taxed at 35%. Although many non-resident aliens elect to purchase real estate under this method to avoid income and estate taxes, it is not as easy to accomplish in practice.
Another way to invest is by owning a domestic corporation, which generally will be considered a United States Real Property Holding Corporation (USRPHC), and can get treated as a domestic corporation by holding U.S. real estate to avoid a 35% withholding tax.
Beyond forming a corporation, investors can enter into a partnership. This usually results in a lower income tax burden since individual tax rates on capital gains are typically lower. If this is done through an LLC, personal liability may also be limited.
This is a very complex area. We have only touched on the capital gains and estate taxes, and have not mentioned how rental income, if any, would be treated. Although this article is designed to dispense some basic advice and lead investors in the right direction, it would behoove those interested in delving further to consult legal and tax advice from experts.