Each tax year our office discovers that investors have changed how they hold title to their Florida property. Most times the change has involved adding or removing a family member or moving the property from individual ownership to an LLC (Limited Liability Company), Corporation, Partnership or Trust. Unfortunately, while the process of transferrin g property between different types of owners is relatively straight forward the tax consequences of the transfers may significantly impact the transferor and/or transferee at a later date.
Individual Ownership
Does not attract any of the costs associated with forming, maintaining and reporting income derived from an LLC, Partnership or Corporation. Individuals are subject to more advantageous capital gains tax rates upon the sale of property although they may be subject to U.S. estate taxes.
LLC
Taking ownership via a disregarded LLC in the U.S. limits exposure to liability. Like shareholders of a Corporation, all LLC owners are protected from personal liability for business debts and claims. LLC owners stand to lose only the funds they invest in the LLC. Owners may dissolve an LLC at any time and take back any assets that are not owed to LLC creditors.
Each owner of the LLC is taxed on their proportionate share of LLC profits at individual income tax rates. In addition, the IRS sees through the disregarded entity so income and capital gain is taxed on the owner as an individual. However the tax authorities in a foreign investor’s home country may not take the same view and may tax the LLC instead as a Corporation. An LLC may also choose to be taxed as a Corporation.
Corporation
A Corporation is not subject to Estate Tax. They are generally more expensive to form, and primarily used for active trading businesses rather than ”passive” investment activity. Profits are subject to corporation tax, then taxed again when distributed to owners as dividends. Taxes are payable at federal and state level; foreign corporations are also subject to Branch Profit Tax of 30% unless reduced by tax treaty.
Family Trust
A trust allows you to put your assets under the care of a trustee you name and to designate beneficiaries to receive distributions of trust assets under terms in a trust agreement. A trust can be revocable or irrevocable. A revocable trust may be amended or dissolved at any time. Once your assets are placed in an irrevocable trust it is no longer considered your property and the irrevocable trust cannot normally be revoked without a court order. Depending on how the trust is established, each of the beneficiaries may be required to file an annual income tax return to the IRS.
Regardless of the type of entity chosen there are a number of costs and tax consequences of which you should be aware when transferring title on your U.S. property:
Documentary Stamp Tax – payable to the Florida Department of Revenue. The tax rate for documents that transfer an interest in real property is $.70 per $100 of the total consideration paid, or to be paid, for the transfer.
FIRPTA Withholding – U.S. tax law requires that a foreign investor who sells or transfers an interest in U.S. real property is subject to withholding of 15% of the gross sales price. The amount withheld will be refunded if it exceeds the actual tax liability but a seller could wait many months to receive the refund. If FIRPTA withholding is not handled during a transfer between individuals or entities then it may impact the time taken to obtain a refund of the overpaid withholding at the time of the eventual sale of the property.
IRS Form 5472 – Introduced in 2017, IRS requires information reporting on any exchange of money or property between a disregarded entity such as a single member LLC, revocable living trusts and land trusts. Adequate books and records to support the information filing are required and a $10,000 fine applies for noncompliance.
Gift Tax – adding a family member to the deed as a joint owner for no consideration is considered a gift of 50% of the property’s fair market value for tax purposes. If the value of the gift exceeds the annual exclusion limit ($15,000 for 2018) the donor will need to file a gift tax return to report the transfer.
Estate Tax – under existing law, the U.S. estate tax is imposed at the death of foreign individuals owning U.S. real property based on the entire value of the property that exceeds $60,000. Tax treaties between the U.S. and the individual’s home country on the taxation of the owner should be taken into account.
Changing title on your U.S. investment may be exactly the right choice but should be based on advice from both a legal and tax perspective. Best advice is to consult with both an attorney and tax consultant BEFORE making any change to title.
