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.