Tax implications of Investing In Real Estate in the United States Presented By Todd Baldwin, CPA

Taxes Affecting the foreign Investor. Income Taxes Rental Property Profits. Gains on Sale of property Estate Taxes Upon the death of a property owner www.BaldwinAccountingCPA.com

How is income taxed in the US Residents are taxed on world wide income Non-residents are taxed on US source income only www.BaldwinAccountingCPA.com

Income Taxes Individual Rates Capital gains Start at 10% Can be as high as 39.5% Capital gains Range from 15% up to 23.5% of long term gains. A holding period of over 12 months is considered long term www.BaldwinAccountingCPA.com

Estate tax issues The Estate tax rate is currently 40% The exemption is only $60,000 for non residents This means that if you buy a $100,000 property then: Upon death, the estate tax will be 40% of the value exceeding $60,000. $40,000 times 40% = $16,000 www.BaldwinAccountingCPA.com

Estate tax Mitigation Reduce Estate tax exposure: Own property through partnership LLC and keep each partner’s ownership under the $60,000 threshold Purchase life insurance under an ILIT to mitigate the estate tax. Own real estate through a foreign corporation. Mortgage property to keep under $60,000 equity www.BaldwinAccountingCPA.com

Estate tax Mitigation-Cont’d Own the US partnership through a foreign partnership. Sell the property if any owner becomes terminally ill. www.BaldwinAccountingCPA.com

Possible LLC Tax Structures For Non-Resident Owners C-Corporation Form 1120 Partnership Form 1065 Disregarded Entity Form 1040 Not a pass through Taxed at 37% Federal Taxed at 5% State (FL) Dividends taxed at 18-24% No capital gains relief Can be owned by any type of entity Pass through Taxed at partner level up to 39.9% No state tax Capital gains 18-24% Taxed at partner level up to 39.9% Salary Tax Implications 5728 Major Blvd., Suite 501 · Orlando, FL 32819 Phone (407) 363-0890 · Fax (407) 363-1666 www.BaldwinAccountingCPA.com

FIRPTA and its implications There is a 15% withholding required if a property is sold. 15% is based on the sales price It is possible to file for a withholding certificate to reduce or eliminate this tax Must be done before sale occurs If sales price is under $300,000 and purchaser will reside there, then no FIRPTA requirement. www.BaldwinAccountingCPA.com

US Tax ID numbers Required to file tax returns Documentation required Passport Certified copy of passport Expires if not used in 2 years (new) www.BaldwinAccountingCPA.com

Ownership of US properties Properties can be owned by the following manners: Individually A Trust An LLC A Corporation A Partnership www.BaldwinAccountingCPA.com

LLC’s-Limited Liability Companies Most desirable structure to own Real Estate Flexibility in Tax structure: Can be treated as: Disregarded Entity Partnership Corporation www.BaldwinAccountingCPA.com

Forms to be filed Indvidual Partnership Corporation 1040NR 1065 8804 8805 Corporation 1120 www.BaldwinAccountingCPA.com

Fee considerations If you own a property individually then only one 1040NR tax return must be filed. Fairly inexpensive. For LLC’s treated as partnerships you must file One 1065 tax return plus One 1040NR for each member in the LLC. Obviously more expensive to file Corporations File an 1120 www.BaldwinAccountingCPA.com

US Residency US Citizen Green Card Holder Any person meeting substantial presence test Closer connection to a foreign country exception www.BaldwinAccountingCPA.com

Physical Presence Test Year Days In US Percentage Total 2008 130 2007 120 .33 40 2006 .16 20 Total Days 190 – Resident for Tax Purposes 121 122 40.66 20.33 Total Days 182 – Non-Resident for Tax Purposes www.BaldwinAccountingCPA.com

Other Implications CFC – Controlled Foreign Corporations FP – Foreign Partnerships www.BaldwinAccountingCPA.com

Practical Income Tax Procedures Tax returns for country of non-residence should be done first Country of residency should be done last Credits are received in the country of residency www.BaldwinAccountingCPA.com

Common Mistakes Made by Foreigners Professionals are not consulted Not hiring qualified professional help Fail to file tax returns www.BaldwinAccountingCPA.com

Publications and Forms to Assist Taxpayers Publication 519, US Tax Guide for Aliens IRS Website www.irs.gov www.BaldwinAccountingCPA.com www.BaldwinAccountingCPA.com