Should I buy my property in my name or as a legal entity?
The choice you make can change the tax structure of the asset. The information below is based on experience together with attorneys that we’ve been working for years. For specific questions, it is always better to consult directly with your attorney. When a foreign national buys a property in the United States, the first question to ask is if the apartment will be rented. If so, the rent will be subject to taxation, and this income is taxed differently in each case.
Properties in a Legal Name – The taxes for any person’s income should be paid up to April 15 th the following year. A foreign national is required to request an Individual Taxpayer Identification Number, or ITIN number, which is a tax processing number issued by the Internal Revenue Service (IRS) for reporting any income in the United States.
If a foreign national owns a property that is rented, this income must be reported under the ITIN number. The tax rate applied will be somewhere between 10 to 35% after all maintenance expenses were deducted.
The best advantage in maintain the property under one’s legal name, besides its simple format, is the 15% tax over its sale vale after a year. Also, upon its sale, there will be retention of an additional 10% of the price of sale to ensure payment of eventual capital gain. One of the disadvantages is that in case of succession, and upon the death of the owner, its beneficiaries might face an 18-35% tax over the value of the property. A property under a legal name bears no privacy, as the owner’s information is public record.
Properties in a Legal Name – There are many ways to form a legal entity, and the most common ones for buying real estate are Corporation S, Foreign Company or Offshore, and Trust.
Corporation S – The principal advantage of keeping the deed on as a Corporation S is that there is limited liability, and barring any fraud, partners are protected from any debt or demands against the corporation, and limited to the investment of each partner. There is also the benefit of confidentiality protecting the partners and their finances, when the property is registered under this type of organization.
The income from this property is taxes in accordance to any other law towards corporations. In choosing this structure, the organization can depreciate its assets, deduct its expenses, and accumulate losses. Part of these losses can be carried over another year to compensate for gains in other areas. However, American companies must retain 30% of the dividends of the company’s foreign shareholders. This simple fact can cause double taxation. If the shares of the organization are direct property of foreign shareholders, the estate tax also applies to the value of the shares.
The biggest disadvantage of this structure is that it incurs in a higher tax than if the property were in a personal name, and there is a cost in maintaining the organization. This is why the most common structure used by foreigners to buy a property in the United States is the offshore organization or a Foreign Company.
Foreign Company/ Offshore Organization – In addition to the regular benefits of owning property as a legal entity, such a financial privacy, protecting the assets, and limiting its liabilities, a foreign company in a low-tax foreign jurisdiction like the British Virgin Islands (BVI) is not subject to tax on the estate upon the death of the owner. In general, there are no taxes on income outside the islands, only on USA income when the property is rented or sold. There are no specific requirements to the number of people, or the level of capital to be applied to form this structure, and it provides great privacy. It also does not required annual reporting to the authorities regarding its income.
Trust – This is a private contract, based totally on mutual trust. The property, or part of it, is transferred to an administrator in custody of third parties. This is a complex structure and the main advantage is estate planning and the ability to save on taxes when the 35% rate would apply.
The purchase of properties in the US requires the support of many licensed and insured professionals during its process, to make it a profitable investment. The choice of an attorney that understands the specific requirements for a foreign national is fundamental to the success of this investment. Speak with someone that understands the importance of the proper structure set up and the nuances of working with foreigners. Buy and sell with confidence.