Owning Real Estate in the United States
It is common for global families to own real estate in multiple countries: vacation properties, homes for children or parents, commercial real estate for businesses, or even to diversify portfolios.
When it comes to owning property in the United States, it is vital that the ownership structure be set-up in a manner that aligns with your long-term goals—whether you are a US taxpayer or a non-US taxpayer—otherwise there can be unforeseen consequences.
As is often the case, we begin with the end in mind: the property’s purpose and exit plan determines the purchase strategy.
The easiest way to buy property in the US is to own it in your name. However, for non-US taxpayers, there are three main disadvantages to this ownership structure:
- Estate Tax – The federal exemption for non-US taxpayers is only $60,000 USD. Upon death, value greater than this is taxed at 40%. Additionally, it can be subject to state inheritance/estate tax.
- Gift Tax – Transferring property to someone else, a trust, or entity may trigger a 40% gift tax on amounts greater than the allowed exemption. In 2023, the exemption to a non-US taxpayer spouse is $175,000 and transfers to anyone other than a spouse is $60,000.
- FIRPTA (Foreign Investment in Real Property Tax Act) – In 1980, FIRPTA was enacted to ensure foreign persons/entities paid tax on gains when selling US real estate. The property buyer is required to withhold a portion of the sales price and remit it to the Internal Revenue Service (IRS) to ensure taxes owed by the non-US taxpayer seller are paid. The withholding rate is generally 15% of gross sales price but may increase to 21% if the seller is a foreign corporation. FIRPTA applies to a wide range of transactions involving foreign persons and US real estate, including sales of residential and commercial properties, shares in US Real Estate Investment Trusts (REITs), and other entities that hold US real estate. There are a few exemptions to FIRPTA such as when the sale price is less than $300,000 and the buyer will use it as their primary home.
For US taxpayers, there is more flexibility with higher estate & gift tax exemptions, but there are liability, privacy, taxation and succession issues.
For liability, owning property outright means there is no legal separation between you and the property. If someone trips and falls on the premises, you can be sued, and your personal assets would be at risk. Rental property and commercial real estate could be owned in a Limited Liability Company (LLC) to help mitigate liability. Owning your personal residence in an LLC would mean a loss of the primary home capital gains exclusion.
In terms of privacy, if the property is owned outright, your information is public record and can be easily sought out at the county recorder or clerk’s office. For persons with significant assets or those in the public eye, having property details private is often beneficial. Owning your personal home in a Revocable Trust, for example, keeps the ownership private and allows the homeowner to retain the primary home capital gains exclusion upon sale of $500,000 for a couple, $250,000 individual.
Lastly, if the residence owned in your own name is set to be bequeathed via a Will, then the transfer is subject to probate (i.e., the legal process of distributing assets according to your Will). Unfortunately, probate can be both time-consuming and expensive. Some states like California can be particularly burdensome, taking several years to pass assets to heirs.
Fortunately, there are various strategies to avoid the low estate/gift tax thresholds, FIRPTA, and which offer tax efficiency, liability protection, privacy, and circumvent probate depending upon whether you are a US or non-US taxpayer.
A solution for a non-US taxpayer may be to have a foreign corporation own the property thus avoiding US situs rules and consequently the low estate/gift tax for example. A US taxpayer could own rental property in an LLC which provides liability protection and LLC is owned by their trust – achieving both liability protection and privacy.
These different ownership structures have pros and cons and must be carefully evaluated to select the appropriate arrangement to meet your long-term goals.
As wealth planners, we at Avrio, assist clients with structuring real estate ownership to help them understand the implications, plan properly, and accomplish their personal and financial objectives.