DLA Piper

3 RED LIGHTS AND 3 GREEN LIGHTS FOR

NON-US INVESTORS IN US REAL ESTATE:
TAX CHALLENGES AND SOLUTIONS

 

Investment in US real estate by non-US investors is increasing. Non-US investors acquired almost $23 billion in US real estate, representing a 9% increase over 2012 and accounting for 13% of all real estate transactions in the US from January through August of 2013.*

Given this trend, real estate investment advisors and others involved in real estate transactions in the US need to understand how to structure these investments in the most tax-efficient manner possible.

 

 

3 TAX IMPEDIMENTS TO NON-US INVESTMENT IN US REAL ESTATE

 

 

Effectively Connected Income: Income and gain from non-US investors real estate investments are generally taxable under the effectively connected income (ECI) rules, specifically, rental income and/or gains from the sale of US real estate.

 

 

FIRPTA: The Foreign Investment in Real Property Tax Act (FIRPTA) imposes significant taxes on dispositions of US real property interests. Complicated withholding tax rules apply regarding US counterparties.

 

 

Non-US Regulatory Concerns: In addition to US tax issues, non-US investors can have non-US tax and regulatory concerns. For example, non-US investors may need to comply with certain informational reporting requirements in their home jurisdictions.

 

 

3 STRUCTURING SOLUTIONS

 

 

Foreign Investor as Lender: Rather than owning a partnership interest in a fund or equity in a US real property holding corporation, a foreign investor may make a loan secured by US real estate.

 

 

Offshore Blockers: One may acquire US real property interests in an offshore corporate entity and transfer the equity in such an entity entirely free of US tax. However, any well-advised buyer would discount the purchase price of such an offshore corporation for the embedded US tax. If this offshore corporation is formed in a tax haven, any effectively connected income will not only be fully taxable under US rates, but also be subject to an additional 30% branch profits tax.

 

 

REITs: Often utilized by non-US investors to either minimize or avoid US federal income taxation, REITs’ benefits include avoiding state tax filings for the jurisdictions where the REIT owns assets and converting rental income into dividend payments. However, gains that a REIT derives from dispositions of US real property interests will be taxable under FIRPTA in the hands of a non-US investor.

 

 

* According to Real Estate Analytics

 

Read more about these impediments and their solutions »

For more information about these issues, please contact John Sullivan or Robert LeDuc.

 

Published by DLA Piper LLP (US)
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