Part I: Foreign Investment in U.S. Real Estate
The primary tax impediments to foreign investment in U.S. real estate in general and in real estate funds specifically are U.S. income, capital gains and withholding taxes. Adding Private Placement Life Insurance (PPLI) in combination with trusts and LLC elements eliminates or mitigates U.S., withholding taxes, U.S. income and capital gains taxes, and estate taxes.
In Part I, we discuss the obstacles that non-U.S. persons face in investing in U.S. Real Estate. In Part II, we will discuss how PPLI can greatly increase a non-U.S. investor’s return on their investment, and also simplify their reporting obligations.
• Effectively Connected Income: Although non-U.S. investors’ gains from US stock are generally not taxable, income and gain from their real estate investments are generally taxable under the effectively connected income (ECI) rules. Specifically, rental income and/or gains from the sale of U.S. real estate are both generally treated as ECI. U.S. source rental income allocable to a foreign investor is typically not entitled to any treaty preferences. ECI is generally taxed to such foreign investors under the same tax rates that apply to U.S. taxpayers, and foreign investors that receive ECI are required to file US federal and state income tax returns. Finally, the FIRPTA rules described below can also transform sales of stock (or other equity interests) and/or capital gain dividends from REITs into ECI.
• FIRPTA: Enacted in 1980 to combat perceived unfair advantages for foreign investors in U.S. real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) imposes significant taxes on dispositions of US real property interests. Specifically, Section 897 of the Internal Revenue Code of 1986, as amended, essentially treats such gain as ECI. In addition, as explained below, complicated withholding tax rules apply with regard to US counterparties in such transactions.
• Non-US Regulatory Concerns: In addition to U.S. tax issues, non-US investors can have non-U.S. tax and regulatory concerns. For example, non-U.S. investors may need to comply with certain informational reporting requirements in their home jurisdictions.
Significant investment capital for U.S. real estate transactions and funds has been and will continue to be raised from non-U.S. investors. In light of this fact, it is important that real estate advisors, investors, and owners understand the tax challenges, as well as the potential solutions, involved when non-U.S. investors invest in U.S. real estate. PPLI is an integral element in these solutions.
In Part II, we will compare the various structures generally used by non-U.S. persons for investing in U.S. real estate with the addition of PPLI. Adding the PPLI advantage is a cost-effective way to give clients additional return on their investments and legitimate, enhanced privacy in their structures.
Read more about Private Placement Life Insurance, (PPLI).
We wish our many clients and advisors around the world a joyful Holiday Season, and the best possible 2018.
Your comments and questions are always welcome!
by Michael Malloy CLU TEP RFC, @ Advanced Financial Solutions, Inc