Considerations For Foreign Investors Of U.S. Property

Foreign nationals can freely buy U.S. real estate for their own personal use as a residence, either in their own names or through corporations or other entities, without having to report to any government agency. Things get more complicated, however, when foreign nationals or entities go to sell U.S. real estate or co-op assets. The purchase of U.S. assets by foreign investors warrants estate planning in advance of the intended
acquisition. Foreign investors do not have the benefit of U.S. estate tax exclusions, which is $3,500,000 for 2009. U.S. estate taxes are based on the value of the property at death not the gain in value from the acquisition date.

Absent estate planning, a foreign investor’s estate can owe up to 46% of the value of the property in Federal tax upon his or her death. State and local tax obligations can increase the tax obligation to over 50% of the value of the property. Foreign investors can structure their acquisitions through off-shore entities to avoid U.S. estate and gift taxes. Income tax on the rental income or gain from a sale can also be avoided, depending on
the country of residence, by proper planning. Foreign investors can establish a holding corporation that is outside the U.S. either (i) in the country of residency or (ii) in a country with favorable tax rules such as Bermuda or the Bahamas. The holding company then establishes a U.S. subsidiary which then acquires and holds the U.S. asset. The foreign investor then owns stock in the foreign holding corporation. Upon death of the foreign investor, there are no estate taxes due as the transfer of shares of a foreign corporation are not subject to U.S. estate taxes.
There are two forms of apartment ownership in New York City, co-operative and condominium. Coop apartments require board approval. Such boards are generally very unreceptive to holding corporations purchasing into the co-op association. Condos are therefore better suited to foreign investors.

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