As of June 30, 2012, 20% of total residential purchases in Florida were made by foreign buyers. They spent U$10.71 billion dollars according to a study by Florida Realtors. The City of Miami and its beautiful surrounding beaches remain the hot spot for international buyers, representing 31.3% of total sales. Buyers from Latin America and the Caribbean together made for 35% of all foreign purchases leading Western Europeans which represented 22%. Approximately, 82% of foreign sales were all cash in contrast to 87% of US buyers used mortgage financing .
In summary, foreign ownership of U.S. real estate has increased significantly in the last years because of the decline in US property values thus creating a lucrative investment opportunity for foreign investors. While many HNW foreign clients are tapping into these opportunities, are they fully aware of the tax implications made with these recent purchases?
When planning to acquire a U.S. based real estate, foreign individuals need to be aware that if purchased directly it is classified as “real property” and it is subject to U.S. Estate Tax and that as foreigners they are limited to a $60,000 tax exemption. Typical scenario – Brazilian national is seeking to purchase a $2,000,000 condominium on South Beach. Pressured by the Realtor he purchases in his/her own name and figures they can do the tax planning later. In doing so, the Brazilian would have an Estate Tax exposure of $679,000. If we advise the Client correctly and follow proper planning protocol this situation could easily be mitigated.
The Foreigner can consider various alternatives in planning for the purchase and how title should be held which may include:
- Direct Ownership with Life Insurance funding the possible Estate Tax Implication: a common, low cost mechanism which is commonly utilized when clients prefer to purchase directly or those clients that may have purchased properties in the past.
- Purchase via U.S. L.L.C. (Limited Liability Company): limits liability exposure to the individual but still bears the same U.S. income and estate tax burden.
- Purchase via Foreign Corporation: Capital gain Tax rate could be jeopardized but individual will not be subject U.S. Estate Tax
- Purchase via a combination of U.S. L.L.C tiered with a Foreign Corporation: The two – tiered approach is commonly utilized and can be very effective in limiting liability and tax exposure for the individual. The alternatives listed have advantages and disadvantages, but understanding the foreign investor’s wealth transfer planning goals, financial objectives and tax exposure will set the foundation to implement the optimal solution for the particular individual. The solution should not be standardized as we commonly witness in this area. The Wealth Protection Advisory team is equipped to provide both Clients whom have already purchased property and those considering the opportunity with a simple and cost effective solution that can avoid turning the American dream into a nightmare.
1. Miami Herald 8/27/12
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