Copyright 2008 Maurice Glazer

Transcription

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2 Tax Considerations for the Global Entrepreneur / Investor The Glazer Group

3 Maurice M. Glazer Worked in the industry since 1960 Tax and Accounting Specialist Speaker at numerous corporate and organization meetings. Written & published in many articles and publications Appeared on syndicated television programs and local broadcasts

4 Complimentary Consultation Form

5 Questions Form

6 Frequently Asked Questions Q: A person selling a foreign property (not a primary residence) for a gain, is he liable for both U.S. & foreign capital gain taxes? A: Generally, a person will get tax credits on his U.S. tax return, for foreign taxes paid (no double taxation). Q: Can a foreign property be bought as a second home? What is deductible for tax purposes? A: Yes, foreign property can be considered a second home, thus interest & property taxes are deductible on U.S. returns.

7 Frequently Asked Questions Q: Are there wage & housing exclusions for U.S. citizens working in a foreign country? A: Yes, wage exclusion (up to $85,700 for 2007 & $87,600 for 2008) & housing exclusion (for expenses over $37.57/day for 2007 & $38.40 for 2008) apply for employees working abroad. Q: Can one invest in foreign real estate in a retirement plan? A: Yes, with restrictions (annual appraisal / audit, bond coverage).

8 Frequently Asked Questions Q: Can we do a 1031 exchange between a foreign country and the U.S. if it is similar property? A: No Section 1031, (h) 1. Q: Can we do a 1031 exchange between foreign countries. A: Yes, International for International is appropriate. However, You would still be liable for the tax in the foreign country where the sale is made. Q: Are real estate income & capital gains exempt from income taxes in a foreign country, if done in a U.S. IRA or Qualified Plan. A: No, However any taxes paid in a foreign country can be offset on the U.S. tax return via a foreign tax credit.

9 Taxes in United States

10 U.S. Expatriates and Lawful Permanent Residents (Green Cards) Filing of U.S. Tax Returns a) b) Do not move to a foreign country and forget or choose not to file a U.S. tax return. Required filing on worldwide taxable income when residing in or outside the U.S. 1) 2) c) d) Statute of limitations never runs out. Live abroad for 10 years and return penalties and interest may exceed the actual tax. If you have W-2 income or self employed income you have to file. *Reductions available against foreign income: 1) 2) 3) Foreign earned income exclusion $87,600 for 2008 for every tax payer. Deduction for living expenses in excess of $38.40 per day for Foreign tax credit Form1116 * Almost 50% filing show no tax liability because of these items.

11 U.S. Expatriates and Lawful Permanent Residents (Green Cards) Filing of U.S. Tax Returns a) b) Self Employed: 1) If no foreign social security withheld from earnings you must file a Schedule C and pay self employment tax of 15.3% 2) Cannot be reduced by items on D. Special forms required: 1) 2) 3) 4) More than 10% ownership in foreign corporation Form 5471 If controlled foreign corporation (over 50%) tax on prorata share of profits. If beneficiary or trustee of a foreign trust (i.e. Fideiomiso) Form 3520 Have a foreign bank account or other financial account over $10,000 Form TDF I. Special tax on former citizens and long-term permanent residents who leave to avoid U.S. taxes, regardless of intent. Section 877

12 Owning A Foreign Corporation If you own 10% of the shares of a foreign corporation that operates your business or owns real property you need to file Form Failure to file can result in a $10,000 penalty. If you own over 50% of a foreign corporation and are at least a 10% shareholder you should include your prorata share of the foreign corporation s income in U.S. tax return.

13 You must supply the IRS with: Income Statement Balance Sheet Data on its Loans Data on its Operations Data on its Other Shareholders Foreign Trust Owning property if it is residential real property in a foreign trust requires you to file Form 3520 when the trust is established and Form 3520A each year thereafter (also applies if you are a beneficiary or creator of any foreign trust). Penalty for failure to file is 35% of the value of the property. If you purchase property outside of the restricted zone and you own title in your name you do not have to file form 3520.

14 Real Estate As A Plan Asset

15 Real Estate as a Plan Investment Investing in real estate within a qualified retirement plan is a nontraditional investment that requires careful consideration. Real estate includes but is not limited to Limited Partnerships, land, buildings, etc. Some issues do not take into account issues such as changes in law or government policy, or unforeseen events. Prohibited Transactions

16 Individual Retirement Arrangements Consist Of:

17 Kinds of Self Directed Investments Operating Income and Debt Financed Self Directed Investments

18 VERY POPULAR Real Estate Notes Private Placements - LLCs _ LPs

19 IN IRAS Subject to Unrelated Business Income Tax or Unrelated Debt Financed Income Tax (Same IRS code section) IN QUALIFIED PLANS Acquisition Debt for Real Estate is not subject to UBIT or UDFI

20 1. You open a self directed IRA or become a participant in a qualified plan which permits full self direction At the same time; 1. You Locate Investment Property Then; 1. You make an offer on the property, generally in the name of the Plan (e.g., Purchaser: Jay Jones IRA or Jay Jones Defined Contribution Plan) If the offer is accepted;

21 1. You complete a Buy Direction Letter to the Trustee of the Plan in a form acceptable to the Trustee or Custodian (this describes the purchase in detail and may include purchase agreement or contract) At the same time; 1. You read and approve documents from the Title Company/Escrow Agent. These include Property Description, Title Report and Others;

22 1. The Title Company/Escrow Agent sends the approved documents to the Trustee or Custodian who signs them on behalf of your IRA or Plan; 1. Rental or Lease Agreements are assigned by the Seller to the Plan. Any new Rental or Lease Agreements are then made in the name of the Plan. If external servicing is desired, servicing agreements are made between the Plan and the Servicer;

23 1. The Trustee or Custodian sends funds to Escrow. The transaction closes, and; 1. The Deed is recorded in the name of the Trustee or Custodian for the benefit of your account. The Deed is then sent to the Trustee or Custodian; and 1. All Income is paid to the IRA or Qualified Plan. All expenses are paid from the IRA or Plan in direct proportion of ownership.

24 Examples of Self Directed Investments In Tax Advantaged Plans 10 BASIC REQUIREMENTS To Buy a Rental Property With Debt in an IRA or Qualified Plan You can buy Real Estate using debt financing for all or part of the acquisition: 1.You locate a lender; 1.The lender may not have recourse to you, only to the asset being financed; 1.Your credit may not be used to facilitate the loan;

25 1. The Seller may carry back financing; 1. Debt financing will be subject to Unrelated Debt Financed Income Tax (UDFI) involving an IRA. Acquisition debt in a qualified plan is not subject to such tax; 1. Additional debt incurred in either an IRA or Qualified Plan is subject to Unrelated Debt Financed Income; 1. Factor in that even if your account paid UDFI tax, the account will be subject to tax again when withdrawals are made, except in the case of Roth IRAs; 1. UDFI does not apply if the debt has been paid off for a 12 month period;

26 1. UDFI must be paid by the IRA or Plan; and 1. Debt may be paid from other funds in other IRAs, or other Plans. Debt paid from funds not in IRA or Plan will be an excess contribution and may be subject to penalty.

27 Self Directed IRA s Buying a Property And Rehabbing

28 Rehab Property Total Purchase Price IRA Portion Original Investment $10,000 $30,000 Rehab Costs Total Costs $15,000 $5,000 Loan Portion Original Amount Interest Expense $1,000 Total Loan Expense $21,000 $20,000 Total Cost of Acquisition and Rehab $36,000

29 Solutions to a Shortage of IRA Money Make a contribution to IRA or rollover funds from another plan Increase debt finance Sell another asset in the plan to raise cash Bring in partners Sell the property as is Other

30 The Sale of the Rehab Rehabbing completed 110 days Preparation Sell Direction Letter for $56,000

31 Unrelated Business Income Tax on Debt Financed Property in an IRA Profit on borrowed funds: -IRS code requires payment of tax on the portion which is debt financed -Unrelated Business Income Tax Return, IRS Form 990 T for the IRA

32 Taxable Income Tax Rate Deduction 0 to 50,000 15% 0 50,000 to 75,000 25% 5,000 75,000 to 100,000 34% 11, ,000 to 335,000 39% 16, ,000 to 10,000,000 34% 0 10,000,000 to 15,000,000 35% 100,000 15,000,000 to 18,333,333 38% 550,000 18,333,333 and up 35% 0

33 Proportions IRA + Loan 41.67% Percentage Not Subject to UBIT or IRA portion 58.33% Percentage Subject to UBIT or loan portion Sales Price $56,000 Gross Profit $20,000 IRA PROFIT $8,333

34 $20,000 as Gross Profit Loan of $20,000, plus interest of $1,000, was repaid out of escrow. $8, attributable to IRA.

35 Results The unrelated business tax was $2,167. IRA increased by $17,833 after UBIT.

36 IRA Profit From Non-UBIT Portion IRA Profit from Non-UBIT $8,333 Profit Allocation: To Loan Subject To UBIT $11,667 Expenses: Allocated to UBIT $2,917 Amount subject to UBIT $8,750 UBIT paid by IRA $2,167 Profit on Loan Portion After IRA paying UBIT $9,500

37 IRA-IRC 408 SEP-IRC 408(k) Qualified Plan(s) IRC 401(a) Available To Individual Businesses Businesses Deadline to Establish April 15th Due Date for Employer Tax Return Last Day of Business s Tax Year (i.e. Dec. 31 for Calendar Year) $4,000 $45,000 $45,000 to $200,000+ Invest in Real Estate Yes Yes Yes Leverage in Real Estate Yes Yes Yes UBIT in Leveraged Real Estate Yes Yes No Loan Out Yes Yes Yes Borrow From No No Yes Annual Filings No No Yes Contribution Limit

38 Management Fee Doe General Partner, Inc. (C Corp) 2 %_ I Cash Stocks/Bonds Other Doe Family Limited Partnership II JD 50% JD 50% JD 49% Texas D&E Investments Real Estate JD 49% Defined Benefit Plan Medical Reimbursement Plan Legal Cost $3,400 Including Filing Fees

39 Starting up an International Business

40 Starting Up a Business Things to Do Identify and Select Structure Consult Attorney, draft documents File all necessary legal documents Obtain Tax ID number (s) Permits Bank accounts Establish books for business Obtain required insurance coverage (if any) Staff your business Go!

41 Starting Up a Business Things to Consider Citizenship taxes US Citizen Relinquish Citizenship (exit taxes) Professionals (here and there) Funding Sources Foreign Tax Credits Foreign Currency Real Estate

42 Doing Business Internationally Business Resources Buying Real Estate

43 Maurice M. Glazer Chief Executive Officer From U.S From Mexico