INTERNATIONAL TAX – Tax Efficient Investment in US Residential or Commercial Property for Nonresident Individuals and Businesses

Case Studies | Prager Metis | Jul 26, 2021

Tax Efficient Investment in US Residential or Commercial Property for Nonresident Individuals and Businesses

Nonresident clients, including individuals, trusts and corporations, are generally exempt from U.S. capital gains tax on the sale of US capital assets, including investment securities and U.S. corporate shares.  However, investments in US real property interests may be subject to 3 types of U.S. tax.  First, under the U.S. Foreign Investment in Real Property Tax Act (“FIRPTA”), nonresident clients (individuals and corporations) are subject to tax at ordinary rates on gains from the sale of US real property interests, which includes (i) residential property, (ii) commercial property and (iii) stock in a US corporation whose primary assets are US real property.  This tax is generally enforced by requiring the buyer to withholding 15% on the gross sales amount.  Second, nonresident individuals that own US real property interests can be exposed to US estate tax on death.  Third, nonresident clients may be subject to US withholding tax on US source rental income, interest and dividends.  The withholding rate is 30%, unless reduced by an applicable US tax treaty.

The U.S. FIRPTA, estate tax and withholding regimes put a premium on advance planning for the acquisition, holding and disposition of U.S. real property acquisitions.  Relevant tax considerations for planning our clients’ tax efficient acquisition of U.S. real property interests included:

  • Choice of ownership – direct individual ownership vs use of entity(s), including a US corporation, a US partnership or a foreign corporation.
  • Number of properties to be acquired.
  • Whether property will be acquired by more than one owner.
  • Expected investment period.
  • Type of income – i.e., long term investment relying on appreciation of property vs current rental income (or both)

Outcome and Benefit

Prager Metis has advised numerous nonresident clients on the most tax efficient structures for investing in US residential or commercial property.  There is no simple, one size fits all solution for such investments, for each separate client, Prager Metis develops a tax efficient structure is tailored the client’s particular facts and circumstances. Our international tax specialists help client with each of the following considerations:

  1. Planning the tax efficient acquisition of property to minimize taxes on rental income and tax on ultimate disposition. and to manage estate tax exposure.
  2. Advice on tax efficient financing of rental property that reduces US taxable income.
  3. Advice on planning to minimize US withholding tax on dividends or US partnership allocations.
  4. Advice on choice of state for US entity as well as state property tax and sales considerations.
  5. Use of foreign intermediary companies in low tax jurisdictions.

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As the year draws to a close, taking proactive steps in your financial planning can significantly impact your tax liability. This checklist provides a guide to key strategies that individuals can consider before the end of the year to potentially decrease their income tax. By strategically managing income, deductions, and investments, you can optimize your tax situation and position yourself for a more tax-efficient financial future.

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