U.S. Tax Structures Utilized in Connection with Foreign Investment in U.S. Real Estate
Kelley Drye Client Advisory
U.S. real estate is expected to attract a record amount of foreign investment in 2016. The U.S. real estate market is perceived as a safe haven in light of economic uncertainty in China, the refugee crisis in Europe and the recession in Brazil. Low interest rates, a relatively stable U.S. economy and the liquidity and transparency of the U.S. real estate market also contribute to the record increase in inbound investment.
The primary economic objective of a foreign person investing in U.S. real estate is to maximize its after-tax net economic return. Tax considerations, both U.S. and foreign, play a major role in structuring foreign investment in U.S. real estate. The foreign investor’s structuring objectives typically include:
- Minimize U.S. income and withholding tax;
- Avoid U.S. estate and gift tax;
- Minimize foreign tax;
- Insulate liability by investing through a limited liability entity; and
- In certain, but not all, cases, preserve anonymity.
The attached U.S. Tax Structures Presentation describes six different tax structures that should be considered by a foreign person investing in U.S. real estate. There is no “one-size-fits-all” structure. The optimal tax structure will reflect the foreign investor’s unique profile.
After describing the different tax structures, the presentation discusses how funding the operating entity with debt could reduce U.S. tax and create the opportunity to repatriate funds to the foreign investor with minimal or no U.S. withholding tax.