The Law Office of Leonardo Heidner P.C. | Leonardo Heidner, Esq.
It is no secret that Brazilians are helping the real estate market in South Florida which has been largely credited for Brazil’s booming economy. Wealthy Brazilians are looking for a second home and/or interested in a good investment. Brazilians and other foreign buyers usually structure their ownership of US situs property by placing title in the name of offshore corporations. Depending on the objectives of the foreign buyer, this strategy may, in fact, be a good alternative of ownership as long he is aware of all tax consequences, not only the US estate advantage.
Pursuant Treas. Reg. 20.2105-19f), shares of stock issued by a foreign corporation, when owned by a nonresident noncitizen (NRNC) of the United States. This means, if the individual NRNC of the United States becomes deceased while owning shares of an offshore company which in turn owns US real estate or US stocks, the foreign shares will not be subject to US estate tax unless, evidently, the offshore company is simply a sham company. Foreign individuals are subject to this tax only with regard to the fair market value of their US situs assets at the time of their death, and in the near future this tax may increase to 55%. Thus the first precaution that any foreign individual should take when holding a real estate property in the US through an offshore corporation is to make sure that the company is well capitalized and the corporate formalities are followed. This will guarantee that the US real estate will be treated as an asset of the foreign corporation, not of the foreign individual shareholder. The foreign corporation may solve the US estate tax issue for the individual foreign buyer, but there are also income tax aspects of this strategy that deserve careful consideration before opting for this alternative.
First, in case of realization of gains when the foreign corporation disburses the US situs property, there will be two levels of taxation, (a) one on the corporate level and (b) another on the shareholder level. In the level of the corporation, the applicable federal tax rate will be 30% or 35% depending on the tax regime (gross or net regime, respectively), plus eventual state and city taxes. Regarding the taxation on the level of the shareholder, also called “branch tax”, the applicable tax rate will be 30%. This second level of tax may be avoided by liquidating the foreign corporation following sale of the US asset and reinvesting all proceeds in “US assets” which could be additional real estate as long as such new property produces income derived from trade or business. In some cases, ill-advised foreign buyers place title of several US properties in the name of one single offshore corporation. In this case, it may prove to be a challenge to sell all properties and liquidate the company in order to avoid double taxation.
Second, if the shareholder of the foreign corporation is permitted to use the real estate free of rent or at a below-market rental, the IRS may impute rental income which will be subject to a tax rate of 30%.
Sometimes purchasing real estate in the name of the individual buyer or in joint tenancy with rights of survivorship with another family member is the best alternative, particularly when the investment’s purpose is to speculate and expressive gains will be obtained short after one year. This would avoid double taxation, imputed rent and guarantee a preferential tax rate of 15%. Evidently the investor will be taking the risk of US estate tax but with proper planning, the foreign buyer may circumvent this negative outcome.