avoiding capital gains tax on foreign property

[John Stanley]

I'm a US citizen living in Germany, where I am buying rental property. The law here is that if the property is sold after >10 years' ownership, there is no tax on the capital gains. However, I would have to declare this gain on my US tax filing. I'm wondering if I can start a business to buy the property and then keep all the proceeds in the business to reinvest. I might take a small amount out as business income and would then only declare this on my US taxes. Is this legal? Or would I then have to file a separate US return for the business?

[Matthew Johnson]

There are way too many issues to consider here. You need to speak specifically to a tax lawyer about this situation and make sure you do all your homework before you think about investing as a U.S. citizen abroad. All three responses above are correct. You can start a German business, but, as Eamonn McElroy said above, how the proceeds are taxed may depend on how the German company is treated under U.S. law. It’s legal to start the equivalent of a German corporation to reinvest proceeds to give you a potentially favorable tax outcome, but there are a ton of special rules for U.S. citizens investing abroad, with Christopher and Matt above hitting the two biggest issues: antideferral rules under Subpart F and foreign account holding requirements. Antideferral rules under Subpart F of the Internal Revenue Code keep you from holding money abroad to keep it from being taxed.  There is probably no way to get around the Subpart F rules if you want to control and own most of the controlled foreign corporation. Likewise, there is no getting around U.S.-citizen foreign reporting requirements. There are exclusions to foreign reporting requirements, but if you own a foreign entity holding real estate, the exclusions likely will not apply.  When I say foreign reporting requirements, I mean FBAR and FATCA.  If you control interest in most any foreign entity (in the aggregate anywhere in the world outside the U.S.), you will likely have FATCA reporting requirements and probably need file an FBAR report if you have bank account(s) outside the U.S. with $10,000+ (not adjusted for inflation).

*This answer is not intended to provide you with specific legal advice regarding your situation, or to create any attorney-client relationship. The intent is only to provide general information. You should be aware that you cannot rely on this answer to provide you with any protection against tax penalties. You should always consult your own attorney in order to obtain legal advice. I am licensed only in Tennessee, so an answer in another state may be different.