Ruben Flores, CPA & ATTORNEY THE FLORES GROUP Attorneys & Advisors

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com SAN ANTONIO OFFICE: 9901 IH 10 WEST, SUITE

Fax: (210)340-5200 HOUSTON OFFICE: 2425 WEST

1 Ruben Flores, CPA & ATTORNEY THE FLORES GROUP Attorneys & Advisors SAN ANTONIO OFFICE: 9901 IH 10 WEST, SUITE 777 San Antonio, TX Tel: (210) Fax: (210) HOUSTON OFFICE: 2425 WEST LOOP SOUTH, SUITE 200 HOUSTON, TX TEL: (281)

2 THE FLORES GROUP INTEGRATED PROFESSIONAL SERVICE FLORES GROUP FLORES GROUP ATTORNEYS Corporate Services Estate Planning Asset Protection FLORES GROUP ACCOUNTANTS Tax Planning Tax Returns Financial Statements 2

3 TRENDS IN FOREIGN INVESTMENT Texas has seen a dramatic increase in foreign investment in Real Estate because of various factors: Good Investment Opportunity Rising Crime and Violence in some foreign countries To provide better educational and economic opportunities to the family and children Business relocation and domiciliation 3

4 FOREIGN INVESTMENTS IN THE UNITED STATES According to the U.S. Bureau of Economic Analysis, Foreign Direct Investments into the U.S. was $259.2 billion: $253 Billion for acquisitions $4.1 Billion to establish new U.S. businesses $2.4 Billion to expand existing foreign owned businesses 4

Canada----------------------- 11% 4. U.K.-------------------------- 3% 5.

5 RANKING OF COUNTRIES PROVIDING THE MOST STABLE & SECURE REAL ESTATE INVESTMENTS 1. United States % 2. Germany % 3. Canada % 4. U.K % 5. Australia % * According to survey of members of the Association of Foreign Investors in Real Estate (AFIRE) 5

RANKING OF COUNTRIES PROVIDING THE BEST OPPORTUNITY FOR CAPITAL APPRECIATION 1. United States------------------- 30% 2. Brazil---------------------------- 23% 3.

6 RANKING OF COUNTRIES PROVIDING THE BEST OPPORTUNITY FOR CAPITAL APPRECIATION 1. United States % 2. Brazil % 3. China % 4. Spain % 5. United Kingdom % * According to survey of members of the Association of Foreign Investors in Real Estate (AFIRE) 6

7 TOP FIVE U.S. PROPERTY TYPES 1. Industrial 2. Multi- family (#4 last year) 3. Office (#2 last year) 4. Hotel (#5 last year) 5. Retail (#3 last year) * According to survey of members of the Association of Foreign Investors in Real Estate (AFIRE) 7

8 RANKING OF STATES WITH FOREIGN BUYERS OF U.S. RESIDENTIAL PROPERTY 1. Texas % 2. California % 3. Arizona % 4. Tennessee % 5. Colorado % * According to survey of National Realtors Association. 8

9 ROLE OF REAL ESTATE PROFESSIONAL The Real Estate agent/broker is a very important person to the foreign investor because: 1) Agent provides information on Real Estate Investment Opportunities 2) Agent provides information on best neighborhoods and schools for residential real estate opportunities 3) Agent provides information on Real Estate taxes and registrations * Caution: A foreign person is limited on how to live and invest in the U.S. based on their immigration and tax status. 9

10 CRITICAL DECISIONS FOR THE FOREIGN PERSONS Legal and tax implications of investing in U.S. Real Estate U.S. immigration status and options U.S. tax status and obligations Estate and inheritance taxes Best legal forms for a foreign person to invest in U.S. Real Estate 10

11 WHO IS CONSIDERED A U.S. TAXPAYER: DEFINITION & CONSEQUENCES 11

12 THREE CATEGORIES OF RESIDENCY Foreign Persons need to carefully evaluate their residency status before they invest in U.S. Real property: 1) Immigration Resident According to Immigration Law 2) Income Tax Resident According to Income Tax Law 3) Estate Tax Resident According to Estate Tax Law *The definition and rules are different for each category. 12

13 DEFINITION OF U.S. INCOME TAX RESIDENT U.S. Income Tax Resident Foreign Income Tax U.S. Citizens (Born in U.S./U.S. Parents) Permanent Resident/Green Card= USR Substantial Presence (> 183 Days)= Tax Resident USC = U.S. Citizens USR = U.S. Residents FP = Foreign Persons/Non-Residents Not U.S. Citizens Temporary Visas No Substantial Presence (< 183 Days) Treaty Exception Closer Connection Test 13

14 SUBSTANTIAL PRESENCE IN U.S. If a Foreign Person has substantial presence in the U.S. he is deemed a U.S. Income Resident only for taxation purposes Substantial Presence means if total of following exceeds 183 days 1) 100 % of day present of current year 2) 1/3 of days present of prior per year 3) 1/6 of days present of second preceding year Planning tip Foreign Person can avoid U.S. tax classification if he/she qualifies for: 1) Closer Connection to Foreign Country 2) Treaty exception- Four Tests 14

15 INCOME U.S. TAXATION SYSTEM U.S. Income Taxpayer Foreign Income Taxpayer USC = U.S. Citizen USR = U.S. Resident FP = Foreign Person Global Income U.S. Source Income 15

16 DEFINITION OF ESTATE TAX RESIDENT U.S. Estate Tax Resident Foreign Estate Tax Resident U.S. Citizen Foreign Person who lives in U.S. with no present intent to leave Foreign person who does not live or have a domicile in the U.S. Foreign Person who lives in U.S. but has the present intent to leave and return to foreign country 16

17 U.S. ESTATE TAXATION SYSTEM U.S. Estate Taxpayer (based on intent) Foreign Estate Taxpayer Global Estate U.S. Estate USC= U.S. CITIZEN USR= U.S. RESIDENT FP= FOREIGN PERSON 17

through investment Residency through professional or educational

18 IMMIGRATION OPTIONS FOR A FOREIGN INVESTOR U.S. Citizen Permanent Resident Temporary Visas Born in U.S. Born of U.S. parents Naturalized Residency through family Residency through investment Residency through professional or educational achievements Business Visa Investment Visa Student Visa Many Others 18

19 TAX CONSEQUENCES OF IMMIGRATION STATUS TAX CONSEQUENCES U.S. Citizen U.S. Resident (Green Card) Temporary Visas (L-1, E-2, etc.) Global Taxation Global Taxation U.S. Source Taxation 19

20 TAX CHALLENGES FOR FOREIGN INVESTORS 20

21 TAX CHALLENGES FOR FOREIGN INVESTORS TAXES ON U.S. REAL ESTATE GAINS Income Tax Indiv. = 37% Corp. = 21% Capital Gains Tax Indiv. = 20 % Corp = 21% FIRPTA Withholdings Tax Indv = 15 % Corp = 15% Estate Tax Indiv = 40% Corp = 0 % * Note: This chart does not include tax on rentals, property taxes, sales tax, etc. 21

Individually 2) Indirect Investment Companies, Partnership,

22 WAYS TO INVEST IN U.S. REAL ESTATE A foreign person has two ways to invest and own real estate: 1) Direct Investment Individually 2) Indirect Investment Companies, Partnership, etc. *Each form of ownership has different tax consequences 22

23 U.S. TAXATION OF REAL PROPERTY INTEREST Investment Options Direct Investment Individual Indirect Investment U.S. Corporation U.S. Partnerships Indirect Investment Foreign Corporation Note: How you invest determines how you are taxed. 23

24 FIRPTA Foreign Investment Real Property Tax Act FIRPTA taxes real estate gains of foreign investors by requiring withholdings on the gross sales price, regardless if gain or loss on sale. It makes the buyer, agents, and other real estate professionals responsible for the tax if not withheld. Includes sales of Real Estate, and may include sales of corporate stock or partnership interests. *Does not matter if Real Estate is held directly or indirectly, it may be subject to FIRPTA. 24

25 U.S. REAL PROPERTY DEFINED U.S. Real Property = Real Property and its improvements or permanent attachments located in the U.S., also includes stock of a U.S. Real Estate Holding Co. U.S. Real Estate Holding Company = A U.S. Corporation that has more than 50% of its global real property in U.S. real property. The sale of stock of the corporation is treated as a sale of U.S. real property. 25

26 WITHHOLDING REQUIREMENTS - FIRPTA 15% withholding required upon sale of U.S. real property, also sale of stock of USRP company. 15% of gross sales price. Seller and his/her agents are responsible. Forms 8288 & Form 8288-A Required. 26

27 EXCEPTIONS TO WITHHOLDING No Withholding Required if: 1. Seller provides Non foreign affidavit. 2. Sale of house to be used as residence and sales price is less than $300, Seller obtains an Exception Certificate from the IRS. 27

28 FIRPTA EXAMPLES 28

29 EXAMPLE #1 FP U.S. REAL ESTATE Cost $600,000 Price $500,000 Buyer 1. U.S. Real Estate is a U.S. Property 2. Seller and buyer subject to FIRPTA 3. Withholding required at 15% 29

30 EXAMPLE #2 FP U.S. REAL ESTATE Cost $100,000 Price $250,000 Buyer 1. U.S. Real Estate is not consider U.S. property if used as residence and price is less than $300, Seller and buyer not subject to FIRPTA 30

31 EXAMPLE #3 FP Cost $50,000 Stock of Price $100,000 U.S. Inc. Buyer U.S. Real Property 1. Stock is considered U.S. Property interest if more than 50% of assets are U.S. real estate. 2. Seller & buyer subject to FIRPTA 3. Withholding required at 15% 31

32 EXAMPLE #4 FP Cost $500,000 Stock of Foreign Corporation Price $ 1 million Buyer U.S. Real Property 1. Stock is not considered U.S. property regardless of percentage 2. No withholding required 32

33 RENTAL INCOME FROM U.S. REAL ESTATE A foreign person that has rental property in the U.S. is subject to a 30% withholding tax on the gross rentals (no deductions allowed). 1. Foreign Person is responsible 2. Property manager and persons that control the rentals are also responsible 33

property as a U.S. trade or business and it is no longer subject to 30% withholding tax.

34 RENTAL INCOME FROM U.S. REAL ESTATE Tax Planning Tip Foreign Person can make an election to treat the rental property as a U.S. trade or business and it is no longer subject to 30% withholding tax. Instead, the net rental income is taxed at regular tax rates. Deductions are allowed if the election is made: 1) Operating Expenses 2) Interests 3) Taxes 4) Depreciation 34

35 DIFFERENT LEGAL FORMS TO INVEST IN U.S. REAL ESTATE 35

36 U.S. TAXATION OF REAL PROPERTY INTEREST Investment Options Direct Investment Individual Indirect Investment U.S. Corporation U.S. Partnerships Indirect Investment Foreign Corporation Note: How you invest determines how you are taxed. 36

37 INVESTMENT IN U.S. REAL ESTATE AS A FOREIGN INDIVIDUAL Investment in U.S. Real Estate as a Foreign Individual has advantages & disadvantages. + Easier to invest and sell property + Capital gains taxed as long term gains from the sale of U.S. Real Estate. - No asset protection from creditors, lawsuits, etc. - Subject to FIRPTA on sale of U.S. Real Estate. - Subject to estate taxation upon death. - Subject to gift taxation upon gift of property. 37

38 INVESTMENT IN U.S. REAL ESTATE THROUGH A U.S. CORPORATION Investment in U.S. Real Estate through a U.S. Corporation has advantages and disadvantages: + Asset protection from creditors, lawsuits, etc. + Corporation not subject to FIRPTA or Estate Tax + Gifts of corporate stock may not be subject to FIRPTA or Gift Tax. - Stock in corporation is treated as Real Estate and FIRPTA applies if more than 50% of all its Real Estate and business property is U.S. Real Estate. - Corporation subject to regular corporate taxation when it sells the U.S. Real Estate. - Gains taxed at new rate of 21% - Shareholders maybe subject to estate taxation of their stock. 38

39 INVESTMENT IN U.S. REAL ESTATE THROUGH A FOREIGN CORPORATION Investment in U.S. Real Estate through a foreign Corporation has advantages and disadvantages: + Asset protection from creditors, lawsuits, etc. + Gifts of corporate stock may not be subject to FIRPTA or Gift Tax. + Sale of corporate stock may not be subject to FIRPTA or U.S. Taxation + Shareholders may not be subject to estate taxation - Foreign corporations will be subject to FIRPTA when it sells the U.S. real estate - Foreign corporation will have to register in the U.S. and file U.S. tax returns 39

40 INVESTMENT IN U.S. REAL ESTATE THROUGH A U.S. PARTNERSHIP Investment in U.S. Real Estate through a U.S. Partnership has advantages and disadvantages: + Asset protection from creditors, lawsuits, etc. + Partnerships are flow through entities not subject to double taxation + Transfer of partnership interest may not be subject to gift taxation - Partnerships are subject to FIRPTA on the foreign partners share of Real Estate Sales. - Partnerships are required to withhold at maximum tax rate on foreign partners share of profits effectively connected to a U.S. trade or business - Partners maybe subject to estate taxation on their share of partnership. 40

41 STRUCTURES FOR INVESTING IN U.S. REAL ESTATE 41

42 STRUCTURE #1 Foreign Individual No Asset Protection Estate Tax applies FIRPTA Applies Capital Gains Tax U.S. Real Estate (Personal Use) 42

43 STRUCTURE #2 Foreign Corporation U.S. Real Estate (Personal Use) Asset Protection No Estate Tax on shares No FIRPTA on shares No gift tax on shares Regular Tax applies to property FIRPTA applies to property 43

44 STRUCTURE #3 Foreign Corp. U.S. Corp. U.S. Real Estate Asset Protection No Estate Tax on shares No gift tax on shares No FIRPTA on foreign shares FIRPTA applies to U.S. shares No FIRPTA on property Regular Tax rates applies to property 44

45 STRUCTURE #4 FP FP FP FP U.S. LLC U.S. Real Property Asset Protection Estate Tax on LLC shares Reduce Estate Tax No gift Tax on LLC shares FIRPTA applies to LLC shares FIRPTA applies to property Capital Gains rate applies 45

46 STRUCTURE #5 Foreign Corp. Sec. 897 (i) Election Asset Protection No Estate Tax on shares No gift Tax on shares FIRPTA applies to shares FIRPTA applies to property Regular tax rates apply U.S. Real Estate 46

47 STRUCTURE #6 Foreign Individuals Beneficiaries U.S. Irrevocable Trust Asset Protection No Estate Tax No FIRPTA Regular tax rates apply U.S. Real Estate 47

48 THANK YOU! Ruben Flores, CPA & ATTY The Flores Group SAN ANTONIO OFFICE: 9901 IH 10 WEST, SUITE 777 San Antonio, TX Tel: (210) Fax: (210) HOUSTON OFFICE: 2425 WEST LOOP SOUTH, SUITE 200 HOUSTON, TX TEL: (281) www. Floresattorneys.com 48

TAX PLANNING. Foreign Investment In United States Real Estate. By Richard S. Lehman, Esq TAX ATTORNEY

TAX PLANNING. Foreign Investment In United States Real Estate. By Richard S. Lehman, Esq TAX ATTORNEY PART OF THE LEHMAN TAX LAW KNOWLEDGE BASE SERIES United States Taxation Of Investors TAX PLANNING Foreign Investment In United States Real Estate By Richard S. Lehman, Esq TAX ATTORNEY 1 FOREIGN INVESTMENT