There is some exciting news for foreign investors due to recent geo-political developments and the emergence of several financial factors. This coalescence of events, has at its core, the major drop in the price of US real estate, combined with the exodus of capital from Russia and China. Among foreign investors, this has suddenly and significantly produced a demand for real estate in California.
Our research shows that China alone spent $22 billion on U.S. housing in the last 12 months, much more than they spent the year before. In particular, the Chinese have a great advantage driven by their strong domestic economy, a stable exchange rate, increased access to credit, and desire for diversification and secure investments.
We can cite several reasons for this rise in demand for US Real Estate by foreign Investors. Still, the primary attraction is the global recognition that the United States is currently enjoying an economy growing relative to other developed nations. Couple that growth and stability because the US has a transparent legal system, which creates an easy avenue for non-U.S. citizens to invest. What we have is a perfect alignment of both timing and financial law… creating prime opportunity! The US also imposes no currency controls, making it easy to divest, making the prospect of Investment in US Real Estate even more attractive.
Here, we provide a few facts that will be useful for those considering an investment in Real Estate in the US and Califonia. We will take the sometimes difficult language of these topics and attempt to make them easy to understand.
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This article will touch briefly on some of the following topics: Taxation of foreign entities and international investors. U.S. trade or business taxation of U.S. entities and individuals. Effectively connected income. Non-effectively connected income. Branch Profits Tax. Tax on excess interest. U.S. withholding tax on payments made to the foreign investor. Foreign corporations. Partnerships. Real Estate Investment Trusts. Treaty protection from taxation. Branch Profits Tax Interest income. Business profits. Income from real property. Capital gains and third-country use of treaties/limitation on benefits.
We will also briefly highlight dispositions of U.S. real estate investments, including U.S. real property interests, the definition of a U.S. real property holding corporation “USRPHC,” U.S. tax consequences of investing in United States Real Property Interests ” USRPIs” through foreign corporations, Foreign Investment Real Property Tax Act “FIRPTA” withholding and withholding exceptions.
Non-U.S. citizens choose to invest in US real estate for many different reasons, and they will have a diverse range of aims and goals. Many will want to ensure that all processes are handled quickly, expeditiously, and correctly and privately, and in some cases, with complete anonymity. Secondly, the issue of privacy regarding your investment is critical. With the rise of the internet, private information is becoming more and more public. Although you may be required to reveal information for tax purposes, you are not required, and should not, disclose property ownership for all the world to see. One purpose for privacy is legitimate asset protection from questionable creditor claims or lawsuits. Generally, the fewer individuals, businesses, or government agencies know about your private affairs, the better.
Reducing taxes on your U.S. investments is also a major consideration. When investing in U.S. real estate, one must consider whether the property is income-producing and whether or not that income is ‘passive income’ or income produced by trade or business. Another concern, especially for older investors, is whether the investor is a U.S. resident for estate tax purposes.
The purpose of an LLC, Corporation, or Limited Partnership is to form a shield of protection between you personally for any liability arising from the entity’s activities. LLCs offer greater structuring flexibility and better creditor protection than limited partnerships and are generally preferred over corporations for holding smaller real estate properties. LLC’s aren’t subject to the record-keeping formalities that corporations are.
If an investor uses a corporation or an LLC to hold real property, the entity will have to register with the California Secretary of State. In doing so, articles of incorporation or the statement of information become visible to the world, including the corporate officers’ and directors’ identities or the LLC manager.
A great example is forming a two-tier structure to help protect you by creating a California LLC to own the real estate and a Delaware LLC to act as the manager of the California LLC. The benefits of using this two-tier structure are simple and effective but must one musise in implemeimplementingtrategy.
In Delaware, the name of the LLC manager is not required to be disclosed. Subsequently, the only proprietary information that will appear on the California form is the name of the Delaware LLC as the manager. Great care is exercised so that the Delaware LLC is not deemed to be doing business in California. This perfectly legal technical loophole is one of many great tools for acquiring Real Estate with minimal Tax and other liability.