MIAMI REAL ESTATE MARKET

MIAMI REAL ESTATE MARKET:  HOW TO NAVIGATE THROUGH THE REAL ESTATE MARKET WITH IMMIGRATION AND TAX LAWS IN MIND.

Miami continues to rank among the top destinations for buyers throughout the world. Initially, Florida was an advantageous investment for the wealthy and their businesses for its tax incentives, location, and beautiful weather.  Today, Miami is becoming known more and more for its tech start-up scene and encouraging business development. Miami real estate market, compared to other international destinations, is an incredible value. According to the Miami Association of Realtors, 75% of Miami Foreign Buyers intend to use the property as a residential rental, vacation home, or both. Recently there has be an increase in rental growth and this is a strong indicator of long term stability. This also leads many to inquire on whether they can obtain a visa when they purchase one or more properties in the United States.

The answer to this question depends on several factors. If a person is from a country which has a treaty with the U.S. and wants to start his business and the investment is not passive, it is possible. An active development of commercial real estate could form the basis of an E-2 treaty investor application if from a treaty country, or perhaps an L-1A if the person already works for a company abroad that will be related to the US venture. For instance, an investor could buy properties and then ‘flip’ them or manage such properties, which would not be passive investments for E-2 investor visa purposes. Even acquisition of rental property may qualify for visa purposes if there is enough of it and the investor creates a property management company that employs people such as leasing agents, superintendents, maintenance personnel etc.. This means that the enterprise has to employ several individuals (US citizen or legal permanent residents) in order to qualify. Thus, the business must contribute to the U.S. economy by employing U.S. workers. On the other hand, a real estate investment whereby the investor simply holds title to one parcel of property would not constitute a “bona fide enterprise” as required to obtain a visa, and it would not qualify. Each investment shall be viewed individually to determine whether or not it meets all the requirements of the law.

TAX IMPLICATIONS

Foreign investors generally have the same goals of minimizing their income tax liabilities from their US real estate and business investments, as do their US counterparts, although their objective is complicated by the very fact that they are not from the United States. The United States has a special income tax regime that is applicable to foreign persons. Specifically, if the Non–US person derives certain types of passive income, it is typically taxed at a flat rate of 30% (without allowance for deductions), unless an applicable US tax treaty reduces this statutory rate.

In contrast, if the business venture of the foreign person rise to the level of constituting a “US trade or business,” as the typical income producing real estate property does, then the foreign investment will be taxed at the same preferential long term capital gain rate of up to 20% that would apply to a US person, a US LLC, or US trust. There is no preferential capital gains rate for corporations so if the foreign investment is made through a US corporation, the typical federal plus state maximum corporate rates range from roughly 38% to 44%.

In addition to a different tax regime, pursuant to the “Foreign Investment in Real Property Act,” the US imposes a withholding tax on the disposition of a US real property interest by a foreign person. The withholding tax amount equals 15% of the interest’s selling price and is remitted to the IRS upon disposition of the interest. Finally, the individual foreign investors must be concerned with the US transfer taxes (gift and estate taxes) that can apply to the “US Situs assets” (i.e. properties located in the US or stocks of a US corporation / LLC) of a non resident alien at the time of a gift or his/ her death.

There are different structures used to minimize U.S. income and transfer taxation:

– The Limited Liability Company:

            Advantages:

• Avoid FIRPTA withholding;
• One level of taxation on rental income and sale of property;
• Preferential capital gain rates on the sale.

            Disadvantages:

• Uncertain estate tax protection with the use of a foreign LLC as the owner of the American LLC;
• The Name of the LLC owners are public domain, unless the investor uses a foreign LLC.

– The Corporation:

            Advantages:

• Avoid FIRPTA withholding;
• Full estate tax protection with the use of a foreign company as the owner of the American corporation.

            Disadvantages:

• Rental income and gain from the sale of the property will be subject to double taxation (at the corporate level and at the individual level);
• The preferential capital gain rates on the sale are not available;
• The Names of the owners of the Corp are public domain unless the investors use a foreign corporation or a particular type of US                                                Corporation.

– The Trust:

            Advantages:

• Avoid FIRPTA withholding;
• Unique level of taxation on rental income and gain on the sale of the property;
• Preferential capital gain rate on sale;
• Full estate tax protection;
• privacy (in the United States and with regards to the automatic exchange of information agreements at the international level)

            Disadvantages

• The owner loses some control over his/her property as legal ownership of the property will be transferred to the trustee who will  administer it for the benefit of the beneficiaries, holders of equitable title. However, it is possible to structure the trust in order to leave indirectly some control to the owner over his/her property.

For more information about the different legal and fiscal aspects of real estate investments in the US, do not hesitate to contact us!

This blog and website are for informational purposes only and do not constitute legal advice.  No attorney-client relationship is formed even if you post a comment or question.  If you wish to receive legal advice, please feel free to contact me directly so that we may discuss your legal matter in greater detail.