Tax Consequences for U.S. Investors Of Foreign Real Estate
We recently sat with a U.S. client planning to invest on international real estate. Going offshore for your real estate investments changes the game for tax reporting. One of the first consequences is that you will not be able to deduct the interest expense on foreign mortgages.
Tax Consequences of Investing in foreign real estate
Ownership
Holding the foreign property at your personal name will make it easy to report on your personal return same as domestic properties are reported. If you decide holding the foreign property on a foreign company, this will trigger an additional layer of reporting to your personal return: form 5471, Information Return of U.S. Persons With respect To Certain Foreign Corporations, which requires reporting income, expenses, assets, liabilities and equity. It is in itself a second report for each 10% or more foreign company owned abroad.
Company Structure
If you decide to form a company in the foreign jurisdiction, the structure could vary from an LTD. type, similar to an LLC, to a Corporation type. But this structure works for the foreign jurisdiction only. For tax purposes in the U.S., the company is treated as a corporation and its profit will create something call subpart F income similar to the pass-thru concept of LLC and S corporations, where owners of 10% or more of a foreign company will report profits on their personal return, regardless if company’s foreign profit were distributed or not and taxed at regular individual income tax rates.
Reporting
Investing on foreign real estate will involve opening a bank account in the foreign country and if the balance of the account is over $10K at any time, it will trigger FBAR reporting to the U.S. Treasury. If the balance of the account is over $50K, you will be subject to FATCA adding a layer of reporting to your personal tax return. Penalties for not reporting these items go from $10K up to prison if non-reporting involves tax fraud.
Controlled Foreign Company (CFC)
If you control 50% or more of the voting power of the foreign company and own 10% or more of the stock, your controlled company is under the CFC rules that result in subpart F income. This section of the tax code is created to avoid you benefit from deferral of the tax on the profits of the foreign company. Accordingly, you have to report profits of your foreign company if they are non-taxable on the foreign country, which typically happen in the offshore regimes.
We have much more helpful advice and valuable information we’d love to share with you. All you need to do is book your free consultation with one of our tax experts by emailing us at [email protected].
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