Tax advice for Foreign US Real Estate Buyers

Establishing a foreign corporation to buy and own U.S. real estate remains a legitimate basic planning tool that international buyers might wish to consider.

Taking title in offshore companies provides several benefits. First, 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.

Please contact Weinstein & Co. to discuss your tax and business needs, or any other tax matters that may impact you.