Congratulations, you have just “closed” on the purchase of a beautiful condo in Miami overlooking the water. However, a word of warning: Did your real estate broker or anyone else advise you of the potential U.S. federal income, estate, and gift tax consequences of owning that condo before you purchased it? For example, did you purchase the condo in your individual name or through an entity such as a limited liability company or corporation? Is the condo for purely personal use or do you plan on renting it? Depending on the form of ownership (i.e. individually or through an entity) and whether the condo will be used for personal or business use, the potential U.S. tax consequences can vary greatly. As briefly discussed below, there are a number of potential U.S. taxes that may be imposed but, with proper tax planning before closing on the condo, potential tax liability can be reduced or avoided.
In general, the United States imposes income taxes on foreign persons for all U.S. source income. Income from United States real property (including your Miami condo), such as rental income and gains from sales or exchanges, is U.S. source income subject to U.S. income tax. Further, the United States imposes an estate tax upon the estate of a foreign person who dies owning U.S. situs property. For estates of foreign persons, only the first $60,000 of U.S. situs property is exempt from U.S. estate tax. Real property situated in the United States (including your Miami condo) is U.S. situs property subject to U.S. estate tax to the extent its value exceeds $60,000. Lastly, the United States imposes a gift tax on foreign persons who gift interests in real property or tangible personal property situated within the United States (including your Miami condo) at the time of the transfer. Where U.S. income, estate, or gift tax is imposed, a U.S. tax return is required to be filed. Thus, the moment you closed on that Miami condo, you may have knowingly or, as is often the case, unknowingly exposed yourself to some, if not all, of the foregoing U.S. tax laws and may be required to file a U.S. tax return (which, for many foreigners, is contrary to their desire to remain anonymous).
However, through proper U.S. tax planning, there are various ways to mitigate, if not completely eliminate, exposure to some of the above described U.S. taxes and avoid having to file a tax return in the United States. Such planning should be coordinated with tax professionals in the foreign person’s home jurisdiction to ensure that any U.S. tax planning has no unintended tax consequences back home. Through the use of partnerships, corporations, trusts, debt, life insurance, treaties (where the foreign person resides in a country that has an income and/or estate tax treaty with the United States), and other planning methods, the transaction can be structured in a manner that is tax efficient for U.S. taxes purposes and tax purposes in such foreign person’s home jurisdiction. No one structure is perfect; each has its pros and cons that should be balanced against the foreign person’s goals to determine what structure is most in line with those goals. The key to effective tax planning, however, is for the foreign person to speak with a U.S. tax professional before closing on the transaction to ensure that the acquisition of the U.S. real property is structured properly consistent with the foreign person’s goals. Once the transaction closes and the foreign person comes to find out after the fact that the U.S. tax consequences are not what he or she intended, it may be difficult to unwind the transaction absent additional U.S. tax costs that could otherwise could have been avoided had proactive U.S. tax planning been sought out and provided.