Many residential apartments are owned by cooperative corporations (“co-ops”). In New York City, it has been estimated the coop apartments outnumber condominium apartments by three to one. The boards of directors of co-ops have been known to be especially and unreasonably restrictive as to who they will admit as shareholders and residents, and many boards, especially in New York, have acquired reputations of being “snooty” and exclusive. The pop singer Madonna was famously rejected by the co-op board of a very expensive Park Avenue building.
The Wall Street Journal reports (“Co-ops Get Competitive”, August 29, 2013, page A-17) that the boards of cooperative apartments are now relaxing their policies and acceptance criteria in order to appeal to younger buyers, as well as to foreign buyers, who are not willing to put up with onerous admission requirements and unreasonable restrictions. These co-op boards are changing their policies in order to be competitive with condominiums and in order to attract new investment and new buyers.
First, one’s home, whether a co-op, condo, house or otherwise, is normally a very significant asset and should be protected from future claims.
As the Wall Street Journal points out, “while buyers have always been able to buy condos and townhouses anonymously under corporations and trusts, now even some Fifth Avenue [co-op] boards have let brokers know that they would now consider purchases done in the names of trusts or limited liability companies . . . .” And, we would expect, in the names of family limited partnerships (FLPs), which are similar to limited liability companies (LLCs) but offer better asset protection. Thus, ownership of a co-op by an FLP is advisable if allowed by the co-op board.
Second, as noted above, co-op boards are positioning themselves to take advantage of the healthy demand by wealthy foreign buyers for U.S. real estate. As the Wall Street Journal reported, co-op boards have clarified their rules, and made “it clear that international buyers, who are active in the condo market, were welcome” at co-ops as well. We have written before about the appeal of U.S. real estate, especially expensive apartments, to wealthy foreign buyers. We have also discussed how, through the use of certain hybrid trusts, foreign buyers can minimize their exposure to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which imposes an onerous 10% tax on the gross sale proceeds when a foreign owner sells U.S. real estate. Please see our article, How Foreign Purchasers of U.S. Real Estate Can Save Significant Taxes.
As co-ops attract new buyers, domestic and foreign, it is important to consider the best form of ownership of real estate. Ownership in entities such as FLPs and trusts may offer significant asset protection and tax benefits. Please contact us for additional information.
Foreign buyers have purchased more than $83 billion worth of U.S. residential real estate over the past year, representing close to ten percent (10%) of the residential market. These numbers are a 24% rise from last year, itself a strong year for sales to international buyers. (Source: Wall Street Journal, June 12, 2012).
The American real estate market is seen as a buying opportunity for wealthy foreigners, in light of the decline in U.S. home prices and the lower value of the U.S. dollar against some foreign currencies. Foreigners are buying U.S. real estate for their own use, as well as investments – to rent or re-sell.
However, when the foreign buyers later sell these homes, they will have to pay a tax pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”). The tax is 10% of the gross sale proceeds of the sale, withheld at closing.
There is a way to avoid the FIRPTA tax. Prior to the actual purchase of U.S. real estate, the foreign party should set up a U.S. trust, with a U.S. trustee, properly established and with an IRS taxpayer number for that trust. The trust should buy the real estate. The deed should be in the name of the trustee, as Trustee of the trust. The trust is recognized as the buyer and owner of the property. Later, the trust will sell the real estate. At the time of that sale, the trust will pay capital gains tax on the net capital gain earned on the real estate; the FIRPTA tax would be avoided. (More sophisticated tax-compliant strategies also exist for the minimization or deferral of even the net capital gains tax through the use of charitable remainder trusts.)
The foreign buyers could be the beneficiaries of the trust and enjoy use of the real estate. The trust could distribute the net (after capital gains tax) proceeds of the sale to the beneficiaries. The trust might also offer additional benefits, including asset protection and estate planning.
Please contact us for additional information on how foreign purchasers of U.S. real estate can minimize their tax consequences.