As a foreigner considering an investment in real property within the United States, you must take into account current tax codes and laws before finalizing your decision. The most obvious question centers on whether you should pay a higher effective tax rate, forgoing a US tax return. If not, you must file a tax return to secure a lower effective tax rate. Ann Irons, CPA, explains that such an important decision must be made in accordance with several complex codes and regulations. With thousands or even millions of dollars at stake, can you really afford to go it alone?

The Allure of Foreign Investment

Much to American economists’ chagrin, the value of the US dollar has not fared especially well in the previous months and years. For savvy foreign investors, however, investing in US real property represents a lucrative opportunity. One need only glance at a survey of members of the Association of Foreign Investors in Real Estate for proof. Of the five cities listed among the best global sites for investment, four are located within the United States.

Structuring a Foreign Investment

You have several options for structuring your investment, each of which has several challenges and benefits and will be determined in part by your specific goals, whether income generated by the investment is effectively connected, and whether your home country has a tax treaty with the United States. Ask yourself these questions:

What are my investment goals?

Whether you are investing as an individual or as a corporation determines how much you will pay in taxes. As a corporation, you will be taxed on two levels compared to a single level as an individual investor. The optimal solution takes into consideration your perspective on after-tax benefits, whether you plan to sell foreign corporate stock, and whether gift or estate taxes apply. Ann will work closely with you to structure your investment in a way that satisfies these goals.

Do revenues qualify as ECI?

Effectively connected income, or ECI, is that which is connected to a business or trade in the United States. ECI is considered taxable at the current U.S. tax rate and is included in your net taxable income—again, this applies only to foreign investors. If the income is not effectively connected, you will most likely pay withholding taxes based on your gross income. These requirements also apply to foreign corporations, although the IRS will levy a 30% tax on branch profits.

How does a tax treaty affect optimal structure?

In the absence of a tax treaty between your country and the United States, a flat tax rate of 30% will be levied. Each payment you make to the property lessor will include a withholding of this amount. Your non-ECI will still have withholdings, but the IRS will return any amount greater than what you actually owed in taxes. Several types of tax treaty exist. These treaties, which affect the amount of withholdings, will reduce or exempt payments altogether.

Several factors determine the optimal foreign investment structure, and not all can be covered in a single blog post. To learn more about your options, or to request a consultation with Ann Irons, CPA, LLC and her team of professional tax preparers and accounting staff, contact us at 508-966-0700. Irons, who has a bachelor’s degree in management and a master’s degree in taxation, has extensive professional experience with major accounting firms, individuals, and small businesses alike. We serve clients in and around Bellingham, Boston, and the surrounding areas.