Presenting a live 90 ‐ minute webinar with interactive Q&A Foreign Investment in U.S. Real Property: Foreign Investment in U.S. Real Property: Tax Considerations Navigating the Legal Challenges of Acquiring, Owning, and Disposing of U.S. Real Estate WEDNES DAY, MAY 29, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Amy P . Jetel, Partner, Beckett Tackett & Jetel , Austin, Texas Elliott H. Murray, Attorney, Baker & McKenzie , Miami The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Foreign Investment in U.S. Real Property: Foreign Investment in U S Real Property: Tax Considerations May 29, 2013 Amy P. Jetel Elliott H. Murray Beckett Tackett & Jetel, PLLC Baker & McKenzie 7800 N. MoPac, Suite 210 1111 Brickell Ave. Austin TX 78759 Austin, TX 78759 Mi Miami, FL 33131 i FL 33131 Tel (512) 436-9102 Tel (305) 789-8900 Fax (512) 436-9741 elliott.murray@bakermckenzie.com ajetel@btjlaw.com 5 219577
Foreign Investors Gain Share in U.S. CRE Percent ($ Billion) YTD represents through July 2011 Source: Real Capital Analytics, as of August 2011 6
Overview of U.S. Planning for NRAs • Determine home country taxation • Identify whether a treaty applies • Understand the client’s situation and objectives • Understand the client s situation and objectives • Know the basic U.S. income tax rules • Know the basic U.S. estate and gift tax rules • Analyze different ownership structures to meet the client’s goals • Obtain a crystal ball 7
Home Country Taxation • No planning should be undertaken before considering whether home country taxation is relevant whether home country taxation is relevant – Typical planning vehicles for U.S. persons can be disastrous to a nonresident alien (for example, a transfer to a revocable trust by a U K resident will trigger immediate IHT) U.K. resident will trigger immediate IHT) • U.S. taxation of foreign investors may be modified by g y y treaty – No exception from U.S. taxation of gain from real estate, but treaties can reduce or eliminate tax on interest and dividends treaties can reduce or eliminate tax on interest and dividends – Almost all treaties contain “limitation on benefits” provision to counteract abuse 8
Income Tax Treaties & Estate and Gift Tax Treaties state a d G t a eat es • The U.S. is party to more than 50 income tax treaties, but only 16 estate and gift tax treaties (because many countries do not have an estate, inheritance, or gift tax) • Below are the countries with which the U.S. is party to estate and gift tax treaties: – Australia – Finland – Ireland – Norway – Austria – France – Italy – South Africa – Canada Canada – Germany Germany – Japan Japan – Switzerland Switzerland – Denmark – Greece – Netherlands – United Kingdom 9
Treaty Analysis • Treaty analysis first requires an understanding of whether each country considers the client to be resident in that country under its internal rules • Tax counsel in the other jurisdiction is essential T l i th th j i di ti i ti l 10
Identify Client-Specific Facts • Understand investor characteristics – Type – Location – Appetite for complexity Appetite for complexity – Single investor versus multiple investors • How will the property be used? – Personal – Business – Investment • What types of income will the property generate? – Rent Rent – Interest – Dividends – Capital gains – Service Service • How will the purchase be funded? – Equity – Debt • What is the exit plan? 11
Identify Client’s Objectives • Tax objectives – Avoiding cross-border double taxation – Mitigating taxation of operating income – Obtaining long-term capital gains treatment on sale g g g – Avoiding gift and estate taxes – Limiting over-withholding – Limiting personal contact with U S tax system – Limiting personal contact with U.S. tax system • Non-tax objectives – Preserving confidentiality – Facilitating intra-family transfers – Achieving limited liability 12
13 Basic Income Tax Rules
Income Tax Residency • Objective Test j – U.S. Taxpayer: • Citizenship • Green card • • Substantial presence test Substantial presence test – Exceptions: • Closer connection • Treaty-based position Treaty based position • Certain exempt individuals (e.g., foreign students, scholars, government employees) – Consequences: • Worldwide income taxation • Informational reporting requirements 14
Different Types of Income Taxed Differently • Gains • Gains – FIRPTA FIRPTA • Operating (“Effectively Connected”) Income Operating ( Effectively Connected ) Income • Passive (“FDAP”) Income 15
FIRPTA: Taxation of Sales of Real Property • Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) (FIRPTA) – § 897 § 897 • FIRPTA is the exception to the general rule that non- resident aliens are not subject to tax on gains from resident aliens are not subject to tax on gains from the sale of U.S. property 16
FIRPTA: Taxation of Sales of Real Property (cont’d.) ( ) • Gain (or loss) from sale or exchange of “United States real property interest” (“USRPI”) taxed under § 871 (for individuals) p ope y e es ( US ) a ed u de § 8 ( o d dua s) and § 882 (for corporations) as if foreign seller was engaged in the conduct of a trade or business in the U.S. and the gain (or loss) was effectively connected with such trade or business • Therefore, foreign sellers are taxed on gains at the same rates applicable to U.S. sellers, and such gain can qualify for long- term capital gains treatment in the hands of a foreign individual term capital gains treatment in the hands of a foreign individual • Nonrecognition provisions (e.g., § 1031) do not apply unless the seller exchanges the USRPI for property that would itself be taxable in a subsequent sale or exchange 17
FIRPTA: Taxation of Sales of Real Property ( (cont’d.) ) • Nonresident alien individuals’ minimum taxable base for AMT purposes will be at least the lesser of individual’s AMT, or individual’s net U.S. real property gain – Net U.S. real property gain is the excess of the total gains N U S l i i h f h l i from the disposition of USRPIs over total losses from the disposition of USRPIs 18
FIRPTA: U.S. Real Property Interest • Definition of USRPI (Treas. Reg. § 1.897-1) – Interest in U.S. or U.S. Virgin Islands real property: • Includes land and buildings and other improvements on the land • Includes growing crops and timber; and mines, wells, and other natural deposits that have not been severed or extracted from the land • Includes “personal property associated with the use” of the land • Includes personal property associated with the use of the land • Includes “shared appreciation loans” (i.e., loans with direct or indirect rights to share in appreciation in value, gross or net proceeds, or profits from real property) – Interest in U.S. corporation that was a “U.S. real property holding corporation” (“USRPHC”) at any time during the 5-year period preceding sale • Gains from sale or exchange of foreign taxpayers’ interests in partnerships, trusts, or estates that hold USRPIs are treated as received from the sale or exchange of USRPIs to the extent attributable to such USRPIs 19
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