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Foreign Investment in U.S. Real Estate – A F.I.R.P.T.A. Introduction

Foreign Investment in U.S. Real Estate – A F.I.R.P.T.A. Introduction

Many economic, political, and cultural factors make U.S. real estate an attractive investment for high net worth individuals resident in other countries.  These factors are supported by a set of straightforward tax rules that apply at the time of sale.  Alicea Castellanos, the C.E.O. and Founder of Global Taxes L.L.C., looks at the U.S. Federal income taxes and reporting obligations that apply to a foreign investor from the time U.S. real property is acquired to the time of its sale.

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Extension of German Taxation on Foreign Companies Holding German Real Estate

Extension of German Taxation on Foreign Companies Holding German Real Estate

In August, the German Federal government proposed draft legislation that will expand the scope of German taxation to cover the sale of shares in “real estate rich companies” by nonresident taxpayers. The draft legislation proposes that capital gains from shares in non-German companies will be subject to German taxation if more than 50% of the share value is attributable to German real estate. The legislative proposal has wide application, reaching a shareholding that exceeds a 1% threshold at any time in the five years preceding the sale. Dr. Petra Eckl, a partner at GSK Stockmann + Kollegen in Frankfurt, explains the proposal and the practical exposure that arises from its overly broad language.

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New Developments in the World of Reverse Like-Kind Exchanges

New Developments in the World of Reverse Like-Kind Exchanges

Tax planners to New York City real estate families understand that real estate should never be sold.  Rather, it should be exchanged in a tax-free, like-kind exchange.  The exchange can be bifurcated into two independent transactions – one a purchase and the other a sale – without affecting tax-free treatment, provided certain well identified rules are followed.  Moreover, the replacement can be acquired before the sale of an existing parcel is effected.  In a recent advisory opinion affecting property in New York State, the Department of Taxation and Finance issued a taxpayer-friendly advisory opinion involving real estate transfer tax exposure in a reverse like-kind exchange.  Rusudan Shervashidze and Nina Krauthamer explain the ruling. 

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A Year of Guest Features

A Year of Guest Features

This month, we reminisce on the best of 2016, with articles contributed by guest authors from around the world.

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In the Matter of GKK 2 Herald LLC – Effects of the Step Transaction Doctrine

In the Matter of GKK 2 Herald LLC – Effects of the Step Transaction Doctrine

Clients that invest in U.S. real property have discovered that income tax planning for the structure is only once piece of the planning puzzle.  A second piece relates to the imposition of transfer taxes on the sale.  If the property is in New York City, planning must consider the real property transfer tax rules of both the city and New York State.  Both jurisdictions impose tax.  Rusudan Shervashidze looks at recent cases in the State of New York Division of Tax Appeals Tribunal and the New York City Appeals Tribunal involving the same plan, implemented by the same taxpayer, regarding the same parcel of real property.  For New York State purposes, the plan was successful.  However, for New York City purposes, the plan was overturned.  The statutes at the state and city level are almost identical.

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Spanish Tax Implications of Nonresident Private Investment in Spanish Real Estate

Spanish real estate has become an attractive investment opportunity for those in search of high-quality real property at reasonable prices.  Local knowledge of taxes is key for an unsuspecting, nonresident investor to avoid various tax traps.  María Manzano, a partner specializing in tax at Altalex in Madrid, Spain, explains the main Spanish tax consequences that arise during the investment cycle of nonresident private investment in Spanish real estate.

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Insights Vol. 3 No. 8: Updates & Other Tidbits

Fanny Karaman, Galia Antebi, and Nina Krauthamer address recent developments involving (i) the U.S. Treasury Department’s Priority Guidance Plan in the international arena, (ii) the negotiation of a new income tax treaty between the U.S. and Ireland, and (iii) a recently discovered abuse when a disregarded L.L.C. owned by a single foreign member sells U.S. real estate.

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Insights Vol. 3 No. 7: Updates & Other Tidbits

This month, “Tidbits” explores the following developments: (i) the extension of FinCEN reporting requirements by title companies involved in all-cash real estate transactions; (ii) a European Commission decision calling for Spain to recover over €30 million from seven Spanish soccer clubs that unlawfully received State Aid; (iii) other tax breaks involving Spain that are under consideration by the E.C.J. that could affect State Aid cases against U.S.-based companies; and (iv) new rules regarding the need to refresh I.T.I.N.’s issued to nonresident, non-citizen individuals.  Kenneth Lobo, Fanny Karaman, and Galia Antebi discuss these developments.

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A Concise Guide to Acquisition Vehicles for Purchase of U.S. Real Estate by Foreign Individuals

Question: How many ways are there to structure an investment in U.S. real property by a foreign person? Answer: Many. Nina Krauthamer describes five.

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The Meanderings of the Taxation of U.K. Real Estate: Where Are We Going?

For those who are considering the acquisition of U.K. real property for personal use, an unhappy surprise awaits. The U.K. government is actively waging a tax campaign against structures commonly used for these acquisitions and referred to derisively as “Enveloped Dwellings.” Increased stamp duty on land transactions, annual tax on Enveloped Dwellings and related capital gains charges, and extended scope of inheritance tax take the sizzle out of high-value purchases. Naomi Lawton of Memery Crystal L.L.P., London ruminates on this puzzling development.

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Foreign Investment in U.S. Real Estate – Think About Taxes Before Investing

Published in Journal of Taxation of Investments, Volume 32, Number 3: Spring 2015. © Civic Research Institute. Authorized Reprint.

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Indian Investors Purchasing U.S. Real Estate – From a U.S. Point of View

Published in International Taxation, Volume 13, Issue 3: September 2015.

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I.R.S. Proposed New Partnership Rules Under Code §956

The I.R.S. recently released temporary and proposed regulations to limit the use of foreign partnerships to avoid income inclusions under Code §956. The Temporary Regulations are more limited in their scope while the Proposed Regulations are quite broad. If finalized in the current form, the Proposed Regulations would cause most C.F.C. loans to partnerships with related U.S. partners to be investments in U.S. property.

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2015 Summer Budget Announced in U.K.

The first Conservative budget in almost 20 years was announced in July. Large corporations are the winners. Non-domiciled individuals and hedge fund partners holding carried interests are the losers. More funds were appropriated for tax shelter witch-hunts. Martin Mann, Paul Howard, and John Hood of Gabelle L.L.P., London tell all.

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The US Net Investment Income Tax

First published by the Canadian Tax Foundation in (2015) 23:6 Canadian Tax Highlights.

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U.S. Holiday Homes - Top 10 Tax Issues to Remember

Published by GGi in International Taxation News, No. 3: Spring 2015.

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Guidance for Canadian Snowbirds

Published in The Bottom Line, December 2014.

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Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property – Part III

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INTRODUCTION

This is the final article in a three-part series that explains U.S. taxation under the Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”). This article looks at certain planning options available to taxpayers and the tax consequences of each.

These planning structures aim to mitigate taxation by addressing several different taxable areas of the transaction. They work to avoid gift and estate taxes, and double taxation of cross-border events and corporate earnings, while simultaneously striving for preferential treatment (e.g., long-term capital gains treatment), as well as limiting over-withholding, contact with the U.S. tax system, and liability. Often, such structures are helpful in facilitating inter-family transfers and preserving the confidentiality of the persons involved.

PRE-PLANNING

As with everything else, planning can go a long way when it comes to maximizing U.S. real estate investments. Here are a few questions to ask:

Investor Background

  1. Where is the investor located?
  2. Where is the investment located?
  3. What kind of business is the investor engaged in?

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property - Part II

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This article examines the U.S. income, gift, and estate tax consequences to a foreign owner upon a sale or other disposition of U.S. real property, including a sale of real estate, sale of stock of a U.S. corporation, or a sale of a mortgage secured by U.S. real property.

In addition to (or sometimes in lieu of) rental income, many foreign investors hope to realize gain upon a disposition of U.S. real property. The Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”) dictates how gains are taxed from the disposition of United States Real Property Interests (“U.S.R.P.I.’s”). The law has a fairly extensive definition of U.S. real property for this purpose. Most significantly, the law provides for a withholding mechanism in most cases.

WHAT IS A U.S.R.P.I.?

A U.S.R.P.I. includes the following:

  • Land, buildings, and other improvements;
  • Growing crops and timber, mines, wells, and other natural deposits (but not severed or extracted products of the land);
  • Tangible personal property associated with the use, improvement, and operation of real property such as:
    • Mining equipment used to extract deposits from the ground,
    • Farm machinery and draft animals on a farm,
    • Equipment used in the growing and cutting of timber,
    • Equipment used to prepare land and carry out construction, and
    • Furniture in lodging facilities and offices.

  • Direct or indirect rights to share in appreciation in value, gross or net proceeds, or profits from real property;
  • Ownership interests other than an interest solely as a creditor, including:
    • Fee ownership;
    • Co-ownership;
    • Leasehold interest in real property;
    • Time-sharing interest;
    • Life estate, remainder, or reversionary interest; and
    • Options, contracts, or rights of first refusal.

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property - Part I

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INTRODUCTION

U.S. real estate has been a popular choice for foreign investors, whether the property is held for personal use, rental or sale, or long-term investment. Since the passage of the Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”), the governing tax rules have developed and evolved, but have not succeeded in discouraging foreign investment. F.I.R.P.T.A. can be a potential minefield for those unfamiliar with U.S. income, estate, and gift taxation – all of which come into play. This article is the first of a series on understanding U.S. taxation of foreign investment in real property.

TAXATION OF A FOREIGN PERSON

“A foreign person is subject to U.S. income tax only on income that is characterized as U.S. source income.”

As simple as the concept sounds, there are applicable nuances, caveats, exemptions, and exceptions. Therefore, several questions must first be answered to determine the U.S. income tax consequences for a foreign person engaged in U.S. economic activities, including ownership of real property:

  1. Is the income derived from a U.S. source and therefore potentially taxable?
  2. Is the income taxable or exempt from tax?
  3. Is the income passive or active, subject to a flat withholding tax on gross income or, alternatively, to graduated rates on net income?
  4. Is the income earned by an individual or corporation or other entity, each of which may have different rules and applicable tax rates?