Foreign Investor Tax Implications

[Alex Rozenfeld]

Hello BP community,

I was hoping you can help me with a few questions about tax planning for foreign investor in real estate. I'm going to buy an apartment building with foreign equity partner and want to make sure that I include tax liabilities in my calculations.

I understand there are a lot of different legal structures for holding a property.

1. What is the most beneficial structure for the best tax results?

2. What tax rate should foreign investor pay on operating income, equity re-distribution and capital gain?

3. Are there any other withholding taxes?

Thanks!

[Deidra Hubenak]

@Alex Rozenfeld Hi Alex. I am an international tax attorney (and a CPA) and I agree with @Engelo Rumora that you need to talk to a CPA or attorney. But, make sure that they have extensive experience in international tax. Most CPAs will claim that they have this experience, but you typically need to go to a larger size CPA firm to get that expertise.

Unfortunately, there is no cookie cutter answer to any of your questions. The appropriate answer is the dreaded "it depends". We could really get you in trouble if we gave you any advice without knowing all of the facts of your case.

For example, there is a specific set of tax laws that apply solely to foreign investors in US real estate (FIRPTA - Foreign Investment in Real Property Tax Act). These rules can really bite you if you do not know what you are doing. For example, if you buy US real property from a foreign investor and do not withhold or get a withholding exemption certificate from the Buyer, YOU could be liable for paying HIS taxes. This is just one example of the trouble you can get into. Even the rule that Engelo mentions above about Australia not taxing US income is not always true. Sometimes, the income is recognized earlier in Australia and the income offset is not available until the US tax is paid. (But you would be able to amend the prior year return at that time) There are other limits that could potentially apply as well.

Bottom line - You are asking very good questions, but this is too complex an issue and too fact specific to your investment and investor for us to answer on the forum. Either work with a CPA and an attorney very experienced in international tax law to draw up the pro forma financial statements, the entity documents and the agreements with your partner or come pay me $550/hour to get you out of trouble with the IRS later. (I strongly recommend the former).