If you’re not a U.S. citizen or permanent resident and you’re planning on purchasing U.S. real estate, opening a U.S. brokerage account, or making any kind of investment in a U.S. company, you should get advice from a U.S. lawyer before taking any action.
The two most common issues that arise with foreign investment in the U.S. are unexpected taxes and who would be able to access the assets if you pass away. These issues have various implications for different types of assets.
U.S. Taxation on Foreign Owners of U.S. Assets
Investing in U.S. Stocks and Bonds
The U.S. has the richest capital markets in the world, and it is tempting to open a brokerage account to take advantage of U,S. economic activity and low brokerage fees. Income taxes on these investments are often low. Interest on bonds is generally free of income tax, as is capital gain on the sale of stock. While dividends are taxed at a 30% rate under the tax code, treaties often reduce this rate and can even eliminate it entirely.
While income taxes are often favorable toward foreign investment, estate taxes are not so favorable. Without careful planning, nearly 40% of your U.S. investment can end up in the U.S. tax coffers. Even if the assets in an account are exempt from estate tax by treaty, the account may be frozen for over a year until your heirs get clearance from the I.R.S.
Investing in U.S. Real Estate
Real estate is one of the most common types of foreign investments in the U.S. While other U.S. assets are exempt from capital gains tax, foreign owners of U.S. real estate must pay capital gains tax upon the sale of the property. Foreign owners of U.S. real estate are also subject to the Foreign Investment in Real Property Act (FIRPTA), which requires the purchaser to withhold in escrow 15% of the purchase price to cover any capital gains taxes. There are some exemptions from this requirement, including a demonstration that there is no capital gain on the property. Nonetheless, complying with FIRPTA can result in delays that can derail many real estate transactions, potentially depressing the sale price.
U.S. real estate is also subject to estate taxes, which can leave your heirs with a large tax burden.
Strategies for Minimizing U.S. Estate Taxes
Fortunately, there are ways to mitigate the sting of U.S. estate taxes. The two primary strategies for eliminating U.S. estate taxes are to create an irrevocable trust or to purchase the U.S. assets through a foreign corporation.
Strategies for eliminating estate taxes have certain tradeoffs: most notably, the investor’s ability to benefit from the U.S. assets is severely restricted. For example, the investor would have to pay rent to use a property owned by the trust or corporation. An investor’s use of any investment proceeds held by the trust or corporation could negate the estate tax benefits.
It’s important to create a plan prior to purchasing the U.S. assets since the opportunity for planning is reduced after the asset is acquired.
Access to U.S. Assets by Heirs
The other issue that arises is whether your heirs will have to navigate the U.S. probate process in order to gain access to the U.S. assets. Probate is the court process that authorizes the transfer of assets from your name to the name of your heirs upon your death. The probate process can be burdensome and time consuming, especially when international issues are involved.
You can avoid probate by making the investment through a trust. You may be able to avoid probate on brokerage accounts by naming a beneficiary on the account. Even if probate is avoided, the asset may be useless until your loved ones receive a transfer certificate from the IRS.
Fortunately, probate, estate taxes, and IRS reporting requirements can be all be avoided with certain types of advance planning. To find out how, contact our office to schedule a consultation.
