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“Girls, champagne, flash”, Frank López’s phrase in Scarface, is one that sums up much of the charm of Miami, the capital of Latin America. However, it also sums up the reason for many stumbles.

You made your “first million” in, for example, South America, now you want to colonize the capital of Latin America. Of course, you need an operations center; a penthouse overlooking Biscayne Bay. But you don’t want to sacrifice the future of your children for this.

Well, he trusted that you will know how to advise you with a competent lawyer to guide your journey through the maze of federal and state laws and regulations that impact various aspects of the purchase of property in the United States.

This article examines in a general way the most relevant tax considerations in the purchase of real estate in the United States by a foreigner. The article also presents legal strategies to achieve favorable tax treatment.

The two of the most relevant tax considerations when a foreigner purchases property in the United States are: (1) federal property transfer taxes.

* .Definition of “resident” for purposes of United States tax law.

The United States tax code defines a “United States person” as a United States citizen or resident, a partnership or domestic corporation, a state of the United States, or certain types of trusts. The determination of whether an individual is a “resident” of the United States varies in the context of income taxes and transfer taxes. In this article we refer to “foreigners” as those individuals who are considered non-residents in both contexts.

In the context of income taxes, an individual is treated as a resident in a given tax year if during that year the individual is a permanent resident of the United States under immigration laws or if, regardless of the foregoing, the individual meets the test. of “substantial presence”. [1]

In the context of transfer taxes, an individual is considered a resident if they are domiciled in the United States. An individual’s domicile is the place where they live with the intention of staying indefinitely.

Now, in the context of income taxes, a resident, like a citizen, is taxed based on their overall income. On the other hand, a non-resident is taxed only on the basis of his or her income from sources in the United States. Similarly, in the context of transfer taxes, a nonresident is only taxed based on the interest he or she has in the property in the United States. Therefore, maintaining non-resident status for tax purposes has its benefits for foreign investors.

*.Income Tax for Foreigners.

The US federal government taxes the US income of foreign investors under one of two regimes. On the one hand, under the trade or business income regime, income connected to a business or commercial activity in the United States is taxed based on net income with the same rates applied to “United States persons.” On the other hand, under the passive income regime, income that is not connected to a business or commercial activity in the United States is taxed based on gross income at a rate that is typically 30%.

Thus, the income received by a foreign investor from property income in the United States is taxed under the passive income regime, unless it can be somehow connected to a business or commercial activity in the United States.

As for the gain received by a foreign investor from the sale of a property in the United States, a two-step analysis is necessary. The first step is to determine if the property is in the name of a corporation or if it is in the name of the foreign investor or a non-corporate legal entity. If the property is in the name of a corporation, the profit is taxed at the corporate income rate (about 35%). If the property is in the name of the foreign investor or a non-corporate legal entity, then the gains can be considered a capital gain. Capital gains from the sale of a property that belonged to the foreign investor for at least 1 year are taxed at a preferential rate (around 15%).

Now, the second step of the analysis is to determine if the trade or business income regime or the passive income regime applies. If the gain can be taxed as capital gain and falls under the passive income regime, then it will be taxed at the prime rate. On the contrary, if it falls into the income regime for trade or business, it will be taxed with the normal rate for income.

*.Transfer Tax for Foreigners.

Transfer tax refers to the lien for free transfer (for example, a gift to a spouse or child) or transfer upon death (for example, via will). Foreign investors are taxed with the federal transfer tax only based on the interest they have in property in the United States. However, in general, intangible property is not taxed by federal transfer tax. In relation to the above, the rates for foreign investors are the same as the rates for “United States persons.” However, people in the United States have a general exemption of $ 5 million and an exemption for unlimited transfer between spouses. The exemptions for foreign investors are practically nil compared to the previous ones.

*.Strategies.

The design of the most favorable strategy requires a factual analysis of the particular situation of each client. Competent attorneys use several strategies and different variations on them. Among the most common is the irrevocable domestic trust strategy. In this strategy the investor avoids the transfer tax and also receives the benefit of the preferential rate for the sale of the property. A requirement for this figure to provide the aforementioned benefits is that the foreign investor cedes control of the assets to the trustee (who must be an independent third party) and does not retain control through the structuring of the trust.

For foreign investors who prefer not to lose control of assets in the United States, buying the property as a non-incorporated legal entity (such as an LLC) may be a better alternative. As with trusts, the gain from the sale of real property in the United States is eligible to be considered capital gains and the preferential rate is imposed.

However, although shares in a corporation are clearly defined as intangible assets and, therefore, their transfer by gift or death would not be taxed with transfer tax, the code does not include entities in its definition of intangible assets. unincorporated legal entities. In addition, the United States courts have yet to rule on whether unincorporated legal entities, such as an LLC, are intangible property for transfer tax purposes. For this reason, at this time there is no certainty about the potential transfer tax lien on the gift transfer or death of interest in an LLC. However, several competent lawyers and legal scholars in the field believe that it is unlikely that the courts will take the position that the courts will adopt the position that, in this context, the interest of a foreign investor is not intangible property.

On the other hand, to pursue the benefits of buying property in the United States through an LLC, without risking the imposition of the transfer tax, a two-tier ownership structure can be created. The first level would be the purchase of the property as an LLC and the second level would be to maintain the interest in the LLC as a foreign corporation formed in a tax haven, which would possibly provide additional benefits to those discussed in this article.

*.Conclusion

It is important to note that this article is intended to be only a brief introduction to the subject. This article should not be considered an exhaustive examination of the subject. The tax implications of buying real property in the United States are incredibly complex. In addition, there are other relevant considerations such as asset protection considerations and reporting obligations. If you are a foreigner planning to purchase real property in the United States, contact us for legal advice on the matter.

[1] An individual meets the substantial presence test if, in a given fiscal year, they have spent 183 days or more in the United States. You can also complete the test if in a given fiscal year you stayed in the United States for at least 31 days and the sum of the days you were present in the given fiscal year plus 1/3 of the days you were present in the previous year plus 1/6 of the days you were present in the year after the previous one results in 183 days or more. In general, if a person spends an average of 122 days in the United States for 3 consecutive years, they will be treated as a resident for income tax purposes.

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