With the U.S. government focusing on property purchases by international buyers, it is more important than ever that you exercise caution and due diligence to determine who your international clients are. Among other steps, you should ask for bank references, search the buyers on the Internet and hire a competent international tax attorney to ensure that the ownership of the property is structured for tax efficiency and compliance with the tax and disclosure laws of all countries involved.
October 3, 2016 — Establishing a foreign corporation to buy and own U.S. real estate remains a legitimate basic planning tool that your international buyers might wish to consider.
Taking title in offshore companies provides several benefits. Foremost, it allows a foreign buyer to avoid the federal estate tax and the necessity of a domestic probate proceeding should the buyer die while owning the U.S. property. Instead, the buyer is treated as the owner of a foreign intangible property (the offshore company shares), which is not subject to federal estate tax and a probate proceeding.
Beyond this, if the foreign buyers make the acquisition through a foreign corporation, they may avoid paying a gift tax if they later decide to convey shares of stock to someone else. Corporations also limit potential liability if there is an accident while the property is rented. However, buying through a corporation will not reduce the income tax on any gain on sale, as corporations do not enjoy preferential tax treatment.
The Internal Revenue Service can challenge the existence of the corporation as a sham if the foreign buyers ignore the offshore company's existence or otherwise treat it as their alter ego. Therefore, foreign buyers should take steps to reinforce that the offshore company is a separate entity.
We recommend buyers consider creating a formal lease agreement with their offshore corporation and making rental payments as individuals. They also should file federal, state and foreign (if required) tax returns. As an added measure, we have made it a policy to see that annual corporate minutes are prepared for all of our offshore companies.
By taking these measures, legitimate international buyers can take advantage of the benefits of owning U.S. real estate through offshore companies,
Steven L. Cantor is an international tax attorney based in Miami with over 35 years experience advising foreign buyers/sellers.
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