Foreign investing has seen a dramatic increase the last several years. Florida has been one of the more prominent locations where such foreign investing occurs, specifically in real estate. Miami, in particular, contains a lucrative real estate market where many investors from all over the world come to invest. It is imperative that these foreign investors are aware of the various implications when acquiring property with a particular holding structure and properly plan their investments. It is important to note that no holding structure is considered perfect, each structure has its advantages and disadvantages. It all boils down to which holding structure suits each particular client’s needs.
Nonresident vs Resident Alien Status
Miami, being predominantly populated by Hispanics, is home to many non- U.S. citizens. When discussing tax and liability implications in real estate, it is important to distinguish whether the non- U.S. citizen is non-resident alien or resident alien. Non- U.S. citizens are typically classified as non- resident aliens if they’re a noncitizen who is exempt or hasn’t passed the Green Card or substantial presence tests. Conversely, non- U.S. citizens who hold green cards and have been in the U.S. for at least 31 days during the current year and more than 183 days in the past three years are classified as resident aliens for tax purposes and are subject to different guidelines than nonresident aliens.
Types of Ownership and Their Tax Implications
1. Individual Direct ownership
A non- resident foreign investor may own U.S. real property in his or her own name. This is the most basic and cost-effective form of ownership but provides the least amount of benefits and exposes the owner to liability, tax reporting requirements, estate taxes, and Foreign Investment Real Property Tax Act (“FIRPTA”) withholding tax.
2. Ownership Through a Trust
A trust structure will provide very similar U.S. income tax consequences as the direct ownership option. However, if the trust meets certain conditions, it can potentially provide protection from estate tax exposure, unlike the direct ownership option. Accordingly, the trust structure has the ability to be tax efficient from an income and estate tax perspective. Trusts also give the investor added privacy by placing the property under the trustee’s name rather than the investor’s.
3. Ownership Through an LLC
One of the more widely used holding structures in Florida is limited liability companies (LLC). Non- resident foreign investors may acquire property in the name of a limited liability company. Limited liability companies are pass-through entities and, thus, the tax consequences are similar to direct ownership. However, the difference is ownership through an LLC provides the investor with limited personal liability for losses related to the real estate investment.
4. Ownership Through a U.S. Corporation
Another commonly ownership method in Florida is through a corporation. A non-resident foreign investor may also own U.S. real estate through a U.S. corporation. When a U.S. corporation holds the real estate investment, both the taxation of the entity and the taxation of the repatriated earnings must be considered. Additionally, gain from the disposition of stock of a US corporation is also subject to US taxation if the stock of the US corporation constitutes a “US real property interest.”
5. Ownership Through a Foreign Corporation
Generally, ownership through a foreign corporation is not favorable for the investor. Foreign corporations that invest in U.S. real estate can be subject to both U.S corporate taxes but also to the branch profit tax. The main advantage to owning real estate through a foreign corporation is that it will allow you to bypass US estate tax. The US estate tax is based on individual non-resident ownership of US assets, but in this case the assets are directly owned by a foreign corporation.