Richard S.
Lehman
Lehman has been practicing in South Florida for nearly 50 years.
Mr. Lehman began his career in tax law with a law degree from
Georgetown University, a Master’s Degree in tax law from New York
University, and two years of clerking for the Honorable William M. Fay,
a Judge on the United States Tax Court in Washington, D.C. Mr.
ATTORNEY AT LAW Lehman spent several years as the senior attorney of the Interpretive
Richard S. Lehman, Esq. Division of the Chief Counsel’s office at the Internal Revenue Service,
the IRS's internal law firm.
2600 N. Military Trail,
Suite 206 Mr. Lehman has had extensive experience with all areas of the Internal
Boca Raton, FL. 33431
Revenue code that apply to American taxpayers and non-resident
Tel: 561-368-1113
www.LehmanTaxLaw.com aliens and foreign corporations investing or conducting business in
the United States, as well as U.S. citizens and domestic corporations
investing abroad.
Richard works with other lawyers, accountants,
business leaders and individuals who are
struggling to find their way through the
complexities of United States Tax Law.
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— ADVANCED COURSE —
Foreign Real Estate Investor
Tax Planning Techniques
By Richard S. Lehman Esq.
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SEMINAR OUTLINE
Foreign Real Estate Investor
Tax Planning Techniques
BY RICHARD S. LEHMAN, ESQ.
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OUTLINE: Planning Techniques
• Avoidance of the Double Tax on Gains
• Elimination of the U.S. Estate and Gift Tax and
the Branch Tax
• The Foreign Trust – U.S. Estate Tax Avoidance
and Income Tax Benefits
• Tax Bracket Advantages and Individual Planning
• Avoidance of the Double Tax – Other Countries.
• Tax Free Income
• Partially Tax Free Income
• Tax Treaties
TAX ATTORNEY: Richard S. Lehman, Esq • Tel: 561-368-11134 •
www.LehmanTaxLaw.com
OUTLINE: Principle Objectives
• Limited Personal and Asset Liability
• Single U.S. Tax
• Avoid Double Taxation – U.S. and Country of Investor
• Confidentiality
• Tax Planning
– Eliminate U.S. Taxation of Real Estate Income and Gains
– Eliminate U.S. Estate and Gift Tax
– Eliminate U.S. Branch Tax on Foreign Corporations
– Single Tax
– Deferral of Payment of Tax
– Reduce Tax Rates
TAX ATTORNEY: Richard S. Lehman, Esq • Tel: 561-368-11135 •
www.LehmanTaxLaw.com
OUTLINE: Basics
• Tax Rates
• Taxable Persons and Entities
– Foreign Individual Investor
– Limited Liability Company of Partnership
– The U.S. Corporation
– Foreign Corporation
– Foreign Trusts
TAX ATTORNEY: Richard S. Lehman, Esq • Tel: 561-368-11136 •
www.LehmanTaxLaw.com
Foreign Investors – Income Tax
• Non Resident Alien Individuals and Foreign Corporations
(“Foreign Investors”) that invest in U.S. real estate are taxed
similar to U.S. Individual Taxpayers and U.S. Corporations on
their U.S. real estate income.
The term “Foreign Investors” is used for:
foreign individual(s) and foreign entities
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Foreign Investors – Income Tax
Similarities
•Foreign Investors in U.S. real estate will be taxed on their
ordinary income, whether it is from operating income such as
rentals or inventory sales or other income producing
transaction from U.S. real estate.
•Foreign Individual Investors, like American individuals will be
taxed on their capital gains from the sale of investment real
estate at lower tax rates than ordinary income.
•Foreign Corporations, like U.S. Corporations, have the same
rate of tax imposed on capital gains and operating income
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Foreign Investors – Estate & Gift Tax
1. A drastic difference between the U.S. estate and gift tax laws
that govern U.S. persons and Non Resident Individuals who
may die owning U.S. real estate, or foreign individual
investors who give gifts of U.S. real estate to third parties.
2. The U.S. gift taxes and estate taxes on Foreign Investor(s)
are prohibitive and can be as high as 40% of the net value of
the real property gifted or demised.
3. Only a small amount of the value of the real estate,
($60,000), may be a gift or left as an inheritance during the
Foreign Investor’s life without paying U.S. estate or gift taxes.
4. The U.S. estate and gift taxes can be avoided.
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Foreign Investors – Branch Tax
• There is also a unique tax on Foreign
Corporations that build cash reserves from
earnings and profits in the U.S.
• They must either reinvest cash in U.S. assets,
or distribute the cash as dividends or suffer a
tax known as “Branch Tax”.
• This can be an additional 30% tax on profits in
addition to the foreign corporate income tax.
• This is another tax that can be planned around.
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Foreign Investors – Tax Benefits
Because of the laws that favor foreign investments
in the United States; and because of certain
advantages that a Foreign Investor may find if a
U.S. Tax Treaty governs the Foreign Investors,
there can be significant differences and benefits
for Foreign Investors in U.S. real estate; many of
which are not enjoyed by American Investors.
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History of the Real Estate
Taxation
• In the 1980s a new section was added to the
Internal Revenue laws: Code Section 897
• A unique set of tax rules that apply only to real
estate income. An attempt to make sure that a
Foreign Investor paid at least one U.S. tax on
operating income and one tax on capital gain.
• It is often possible for a Foreign Investor to pay
no tax on income that is essentially derived from
real estate profits.
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Investment and Tax Objectives
Principal objectives that affect the
Foreign Investor in U.S. real estate
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Limited Personal and Asset Liability
Insurance
The first solution for the protection of the asset and the owner
is providing for the proper liability insurance for the investment.
Insurance policies covering liability for the typical injuries or
damages that may occur on a real estate property are readily
available in the U.S. from designated Insurance Brokers.
Entity Choice
The second solution for the asset is the proper entity choice so
the real estate asset is not exposed to liabilities of other assets
owned by the Foreign Investor and vice versa and more
importantly so that the Foreign Investor is not personally liable
for any damages that may result from the real estate
investment.
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Investment and Tax Objectives
Single U.S. Tax.
•The Foreign Investor will want an entity that will
facilitate the paying of only a single tax on U.S.
operating profits and a single U.S. tax on gains
from sale.
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Investment and Tax Objectives
Avoid Double Taxation – United States
and Country of Investor.
•Between the two countries, a single tax should be
paid to the U.S. on real estate income and the U.S.
tax or the other countries’ tax may be appropriately
credited among the income taxes of each country.
It is important to maximize the tax credits to avoid
double taxation between the two countries.
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Investment and Tax Objectives
Confidentiality
•The Foreign Investor often is concerned with
the preservation of confidentiality for fears of
kidnapping in their own country and a number of
other reasons. Therefore, generally the Foreign
Investor would prefer an entity that requires as
little disclosure of their personal information as
possible on U.S. tax returns and U.S.
information returns.
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Investment and Tax Objectives
Tax Planning
•The proper use of entity choices can take
advantage of the following:
1. Tax deductions for expenses
2. Tax exclusions of certain types of income
3. The ability to defer the payment of taxes to a later
date that is provided to Foreign Investors under
the U.S. tax system.
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Tax Planning tools will allow
Foreign Investor to:
1. Eliminate U.S Taxation of Real Estate Income and Gains. Totally
and/or partially eliminate U.S. taxes on certain real estate income
and gains.
2. Eliminate U.S. Estate and Gift Tax. The U.S. Estate and Gift tax
can be completely eliminated with the proper entity choice.
3. Eliminate U.S. Branch Tax on Foreign Corporations. Eliminate
U.S. Branch taxes with the proper entity choice.
4. Single Tax. Insure that only a single U.S. tax will be paid on real
estate profits.
5. Deferral of Payment of Tax. Defer taxation of gains on real estate
profits that are realized for payment at a later date than the
realization of these gains.
6. Reduce Tax Rates. Proper planning can assure that income is
reported in the lower tax brackets among groups of investors.
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Individual Tax Payer
U.S. Corporations
Foreign Corporations
Operating Income
& Gains from Sale
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Minimum and Maximum Individual Tax Rate TAX RATES
•Operating Income 10% to 37%
•Capital Gains Tax 10% to 20%
Minimum and Maximum Corporate Tax Rate
for U.S. and Foreign Corporations
TAX RATES
•Operating Income 21%
•Capital Gain Maximum of 21% plus deductible
State Corporate Income Tax
(Corporate Income Tax not in all states)
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Passive Income
TAX RATES
Maximum U.S. Tax Rate – Interest Income 30%
Payable to Foreign Creditor 15% or less,
Treaty
Maximum U.S. Tax Rate – Dividends 30%
Payable to Foreign Shareholders 15% or less,
Treaty
Corporations
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Maximum Use of Investment Entity
INDIVIDUAL
• Personal Liability YES
• Personal Disclosure YES
(Tax Returns)
• U.S. Estate Gift Tax YES 18 -40%
(Value in excess of $60,000)
• U.S. Income Tax YES
• Operating Income Tax Rate 20%
• Passive Income (no tax treaty country)
• Interest Tax Rate 30%
• Dividends Tax Rate 30%
• U.S. Capital Gains Tax Tax Rate 15-20%
• Tax Planning Techniques Moderate
• Branch Tax NO
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Maximum Use of Investment Entity
LIMITED LIABILITY COMPANY
• Personal Liability NO
• Personal Disclosure YES
(Tax Returns)
• U.S. Estate Gift Tax YES 18 -40%
(Value in excess of $60,000)
• U.S. Income Tax YES
• Operating Income Tax Rate 20%
• Passive Income (no tax treaty country)
• Interest Tax Rate 30%
• Dividends Tax Rate 30%
• U.S. Capital Gains Tax Tax Rate 15-20%
• Tax Planning Techniques Moderate
• Branch Tax NO
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Maximum Use of Investment Entity
U.S. CORPORATION
• Personal Liability NO
• Personal Disclosure NO
(Tax Returns)
• U.S. Estate Gift Tax YES 18-40%
* Value in excess of $60,000 NO GIFT TAX
• U.S. Income Tax YES
• Operating Income Tax Rate 21%
(plus state income tax)
• Passive Income (no tax treaty country)
• Interest Tax Rate 30%
• Dividends Tax Rate 30%
• U.S. Capital Gains Tax Tax Rate 21%
(plus state income tax)
• Tax Planning Techniques Moderately better than Indv.
• Branch Tax NO
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Maximum Use of Investment Entity
FOREIGN CORPORATION
• Personal Liability NO
• Personal Disclosure NO
(Tax Returns)
• U.S. Estate Gift Tax NO
(Value in excess of $60,000)
• U.S. Income Tax YES
• Operating Income Tax Rate 21%
(plus state income tax)
• Passive Income (no tax treaty country)
• Interest Tax Rate 30%
• Dividends Tax Rate 30%
• U.S. Capital Gains Tax Tax Rate 21%
(plus state income tax)
• Tax Planning Techniques Improved
• Branch Tax YES 26
The Tax Planning Techniques
Elimination of the U.S. Estate
and Gift Tax and the Branch Tax
•Tiered Corporations and Multiple
Corporations; Flexibility, and Use of Losses
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Tiered Corporate Structure
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Maximum Use of Investment Entity
TIERED ENTITY
• Personal Liability NO
• Personal Disclosure NO
(Tax Returns)
• U.S. Estate Gift Tax NO
(Value in excess of $60,000)
• Operating Income 21%
– on U.S. Operating corporation only
• Passive Income (no tax treaty country)
• Interest Tax Rate 30%
• Dividends Tax Rate 30%
• U.S. Capital Gains Tax 21% (Income from sale)
– If Foreign Corp sells shares of U.S. Corp to third parties.
• Tax Planning Techniques Significant
• Branch Tax NO
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The Tax Planning Techniques
Avoidance of the Double Tax
•The Liquidation of the Operating Company
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Tax Planning Tool No.1
A Foreign Investor that owns U.S. Real Estate
through a corporation and not as an Individual
can pay a single tax on the gain of the sale of
that Real Estate by Liquidating the Corporation
and Distributing the Cash Proceeds
A Foreign Investor that does not liquidate the
Corporation and Distributes those proceeds will
have a double tax since the Cash Distribution
will be considered a Taxable Dividend
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Complete Liquidation
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Non Resident Investor
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The Tax Planning Techniques
Tax Bracket Advantages and Individual Planning
•Use of the Limited Liability Company
or Partnership – Multiple Taxpayers
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Non-Resident Alien
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The Tax Planning Techniques
Avoidance of the Double Tax
•Deductible Interest Income & Real Estate Profits
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Non Grantor TRUST PLANNING
• Foreign person invests funds for U.S. real estate investment
• Non-grantor trust
• No U.S. estate taxes
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The Tax Planning Techniques
Tax Deferral
•Delayed Tax Payment on Gains
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Like Kind Exchange
A taxpayer may invest in a real estate property,
(Property), and not sell but may exchange that real
estate Property; which has increased in value for a
completely different type of real estate Property,
equal to the increased value of the second Property,
without paying tax on the gain represented by the
increased value of the new property until a later
date in time when the Property No. 2 is actually sold
by the Foreign Investor.
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Like Kind Exchange
Real Estate Investors whose property increased
in value may change their investment from one
real estate investment to a different real estate
investment of a higher value without paying tax
on the gain in their original asset until a later
point in time.
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Like Kind Exchange
• The tax on the gain is deferred until that time the
asset is actually sold to a third party.
• This is accomplished by insuring that the new
appreciated asset will continue to be owned at
the old reduced cost or basis of the Property
asset that has been exchanged.
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Like Kind Exchange
Code Section 1031 governs Like Kind Exchanges
•The exchange property be identified “on or before the day
which is 45 days after the date on which the taxpayer transfers
the property relinquished in the exchange” is an arbitrary
cutoff date which must be strictly complied with.
•The exchange property must be received on or before the
earlier of ;
– the day which is 180 days after the date on which the taxpayer
transfers the property relinquished in the exchange or
– the due date (including extensions) for the transferor’s return for the
taxable year in which the transfer of the relinquished property occurs.
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The Tax Planning Techniques
Tax Free Income
A.The Portfolio Interest Exclusion –
Tax Free Income
B.Attribution Rules
C.Eleven (11) Investors
D.Family Personal Loans
E.Contingent Interest
F.Structured Sales
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By using a portfolio loan. . . you can
have a foreign investor invest in a United
States deal, receive his or her return in
tax-free investment income while the
deal is receiving a tax-deductible interest
payment advantage that reduces the
overall U.S. taxes.
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LESS THAN 10% Equity Holder
The rules are, all of this works so long as the
foreign investor does not own 10% or more of the
deal that he is investing in.
– Be careful, the moment any investor has more than
10% in the deal and that investor is lending money
to the deal, the 30% tax is going to be back on, and
it might be more expensive than it’s worth.
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Planning Tool
• Portfolio Interest income is one of the best planning
tools available and is only infrequently used by the
smaller real estate investors. It has been a successful
financing tool for decades of other industries.
– If the foreign owner of a U.S. corporation was paid interest
income on his or her debt in that corporation, the corporation
can deduct the interest as an expense of the corporation
while the investors pay themselves tax free interest with the
same money; there will be no U.S. taxes paid on U.S. real
estate income.
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Residence for Estate & Gift Tax Purposes
• A U.S. resident for transfer-tax purposes is a person who is
“domiciled” in the U.S. at the time of death or at the time of the
gift – subjective test
– A person acquires domicile in a place by living there for even a brief
period of time, with no definite present intention to leave
• An individual can be a resident for income-tax purposes and
not for transfer-tax purposes, and vice versa.
– There is no “perfect” holding structure for real estate, but it’s even more
challenging for a client who is an income-tax resident and transfer-tax
nonresident
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Estate Tax
• Nonresident aliens are subject to estate tax on
property situated in the United States
– U.S real property
– Tangible personal property located in the U.S.
– Debt obligations of U.S. persons, unless portfolio exemption
applies
– Stock in U.S. Corporations (whether or not publically
traded)
– Uncertain treatment of foreign partnership interests
• No bright line rule
– Some authorities use “aggregate” approach, and some use the
“entity” approach
• Uncertainty on this issue should lead to conservative planning
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SUMMARY
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United States Taxation of
Foreign Real Estate Investors
Richard S. Lehman, Esq.
2600 N. Military Trail, Suite 206
Boca Raton, FL. 33431
Tel: 561-368-1113
www.LehmanTaxLaw.com
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