Advantages & Disadvantages of Buying as an Individual

Trying to decide how to purchase US real property?

Currently, long term capital gains tax rates are 15% for individuals and there is no capital gains treatment for C corporations.  Federal corporate tax rates can be as high as 35%.  What this means for the foreign buyer is a tax savings on the capital gains on the sale of the property if it is held individually as opposed to a standard corporation. However, these taxes can be avoided, and the foreign person can obtain the Federal capital gains tax rate of 15%, by creating an LLC.  LLC’s allow individuals to be taxed at their own individual tax rate, instead of being subject to the high corporate tax rates of 35%.  As a result, there is not a significant advantage in tax treatment to a foreign buyer if they own a property individually.

While there is not a significant difference in tax treatment between owning the property individually or through an LLC, there is a difference in liability protection.  Owning a property individually can subject the foreign buyer to lawsuits in the U.S., whereas, an LLC can protect the foreign buyer’s assets outside those owned by the LLC from liability.  Purchasing additional liability insurance is also an option.

If a foreign person wishes to purchase the property individually, they can create an irrevocable trust to hold the property.  An irrevocable trust will avoid estate tax when the foreign person dies.  In addition, a trust can provide similar privacy protections to a corporation.

While changes to title are possible after closing this generally involves additional costs and, in the case of non-residents, FIRPTA withholding where 10% of transfer value is held pending IRS review. 

There is no "one size fits all" and costs vary significantly between the various types of ownership - call us to discuss your options...

Question Time???

 

Do I have to file a US Income Tax Return to report rental income from my vacation home?

As a non-resident receiving rent from US real property you are subject to a US tax withholding of 30% of the gross rental income.  By filing form W-8ECI and electing to report the US rental income and applicable expenses and pay the appropriate rate of income tax the 30% withholding tax is not required.  Once you make this election it is permanent and may only be revoked in limited circumstances.

Many individuals assume that, because their expenses exceed their rental income that they are not required to file a US income tax return or be subject to tax withholding.  This is not the case.  If a non- resident fails to submit a timely filed return they lose the ability to claim deductions against the rental income causing the gross rents (instead of net rents) to be subject to the 30% tax.

Note - depreciation is a mandatory deduction in the US. If you don’t file a return, you’re still deemed to have claimed depreciation and could be subject to recapture. Failure to file a tax return also reduces your ability to carry forward passive activity losses since the IRS has no record of them. As a result, on a subsequent sale of the property, you would have a taxable income inclusion in the form of recapture with no offsetting loss carry-forward.

To ensure compliance with requirements imposed by the Internal Revenue Service, you are informed that any U.S. tax advice contained in this newsletter is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.

Reminder to Florida Property Owners

The deadline for paying Real Estate Tax and Tangible Personal Property Tax (where required) was March 31st 2015 - did you make your payment?

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If you missed paying your taxes, don't panic!!! Here are the links to some of the Central Florida Tax Collector's sites where you can locate and pay your bill(s).

POLK - TAXES & ASSESSMENTS

LAKE - TAX SEARCH

ORANGE - PROPERTY TAX SEARCH

OSCEOLA - TAX SEARCH

Remember, if you have a US loan then your lender probably submitted your payment in November.  If you purchased property after January 1st 2015 then you will not receive a property tax bill until November 2015.

Need help?  Contact our client services team for assistance, please email clientservices@hbitax.com 

Phone: (863) 968-1010 | Email: info@HBItax.com | Web: HBItax.com