income tax treatment for those investing in RE in the USA

[Andreas Z.]

Hi All

Just wondering where folk are up to regarding tax and the likely tax to be paid on your USA investments.

I am not talking 1 or 2 properties but 20+ SFH's with a $300,000 pa cash flow.

Some givings that are essential to the discussion. Group LLC, Deleware or Wyoming based which is held by an Australian Discretionary trust - This will be treated as a corporation for US taxation and as a consequence the LLC will be treated as a corporation.
Subordinate LLC's - state based which will be the entities that own the properties.

Money sourced from LOC in Australia at an interest cost of about 8%.

The issues

The properties should all be massively cashflow positive at a gross 20+% returns. About 33% will be expenses such as property tax, management, repairs and insurance. So say about $100k

The interest charge will be about $112,000 pa.

And a profit before tax of about $88k

Now the tax

There is a withholding tax on interest payments the minimum seems to be 10% of payment up to 30% payment if its classed as associated.

Because the structure is treated as a corporation there is a 39% corporate tax in the 100k - 335k bracket. This is on a net basis as tax returns will be submitted.

Then on top of this there in an additional tax on dividends which any of the profit will be called when remitted overseas. This seems to be leveled at 30%.

The documentation I am referencing then says that the total tax liability is 57.9% although when you add the 2 rates they exceed this %.

So based on the figures used the interest charge increases from $112,000 to $132,200 reducing profits to $76,800. Not sure if the interest withholding tax is an allowable deduction.

The 76800 is the taxed at the 59% giving a net balance of $31488

76800 - 45312 = 31488

So the net return for investing $1.4mil after all costs is about $31k.

My qualifications - I am not an accountant and have pieced this together from various sources and certainly could (and would:oops: ) have misinterpreted some or all of the tax rules.

These figures change if the LLC (group one) is held in a personal name but I don't believe to many investors will follow this route.

I have not included the calculations that apply to capital gains but believe that there are similar substantial taxes to be paid when trying to expatriate the funds back to Australia.

I look forward to some real life experiences and hopefully revelations as to how some of these tax costs can be minimized.

Regards

PS Forgot to add the overlay of a state income tax that could also apply depending on in which state you elect to invest.

In Georgia there appears to be a 6% state income tax which I would have thought applies to the net earnings after expenses but information gathered has indicated that it is simply 6% (or whatever) of the federal tax to be paid.

ie

(76800 x 39%) x 6% = $1797