Listed below is a brief comparison of possible ownership methods for investment in U.S. real estate available for non-resident owners of U.S. rental property.
The determination of how to structure the ownership of U.S. real estate can be complex when non-residents are involved. There are advantages and disadvantages to each approach and no single approach will be best for every situation. Normally the choice is between individual ownership, Corporation, a Limited Liability Company (LLC) or a Limited Liability Partnership (LLP).
Individual ownership
Does not attract any of the costs associated with setting up, tax compliance and filing and maintaining an LLC, Partnership or Corporation. In addition, individuals are subject to more advantageous capital gains tax rates upon the sale of property whereas corporations are taxed at regular income tax rates.
Limited Liability Company (LLC, also known as a “Disregarded” entity)
Taking ownership via a Disregarded LLC in the U.S. limits exposure to liability. In addition, the IRS sees through the disregarded entity (that is, it is treated as Tax Transparent) so income and capital gain is taxed on the owner as an individual. However the tax authorities in the investor’s home country may not take the same view and may tax the LLC instead as a Corporation. To minimize liability exposure when purchasing more than one property, one may want to consider owning each property in a separate LLC to avoid exposing the entire portfolio. Of course this option increases the fees associated with setting up and maintaining the LLC’s, including annual filings as well as quarterly filings to the IRS for each entity.
Corporations
These are inherently more complex to deal with as, unlike LLC’s or LLP’s, they are taxable entities separate from their owners. Generally, it should be noted that the difference in cost between individual and corporate filings could be significant. Consideration may also need to be given to increasing liability insurance so as to limit liability exposure or to mitigate estate tax exposure with a life insurance policy.
Advantages vs Disadvantages
Individual
Advantages
- Single level of US taxation
- Beneficial U.S. capital gains rates upon sale
- Graduated U.S. tax rates for operational profits
- Can be owned by one person
- Portable availability of home country tax credit for U.S. taxes paid
Disadvantages
- Exposure to U.S. estate tax upon death although this may be minimized by tax treaty or mitigated with life insurance
Disregarded LLC (Limited Liability Company)
Advantages
- “Pass-through” taxation with the limited liability of a corporation
- Business profits or losses reported on individual income tax return
- Owner is protected from personal liability for business debts and claims
Disadvantages
- Tax authorities in investor’s home country may not respect the tax transparency (pass-through) aspects of an LLC that is typical in the U.S. and tax it instead as a Corporation.
- Does not solve the U.S. estate tax issue
Limited Partnership (LP)
Advantages
- Single level of U.S. taxation (no entity level income tax)
- Beneficial U.S. capital gains rates upon sale
- Graduated U.S. tax rates for operational profits
- Limited liability for limited partners
- Portable availability of home country tax credit for U.S. taxes paid
Disadvantages
- Requires at least 1 general and 1 limited partner
- Typically must form Corporation as general partner
- More complicated than an individual or LLP structure
- More expensive than individual or LLP structure
- Partnership must withhold U.S. taxes on foreign partner profits
Limited Liability Partnership (LLP)
Advantages
- Single level of U.S. taxation (no entity level income tax)
- Beneficial U.S. capital gains rates upon sale
- Graduated U.S. tax rates for operational profits
- Limited liability for all partners
- No need for corporate general partner
- Less complicated than an LP but more complicated than individual ownership
- Less expensive than an LP but more expensive than individual ownership
Disadvantages
- Requires at least 2 partners
- Partnership must withhold U.S. taxes on foreign partner profits
Please note:
This information is not intended to provide a recommendation on how to structure an interest in U.S. real property. The final decision must be based on what works best given the specific facts. Any decision must also take into consideration what is important to the investor(s), taking into account their different objectives, risk tolerances and sensitivities with respect to the various issues involving U.S. income tax, estate tax, confidentiality and domicile taxation. Additional treaty benefits may apply depending upon the domicile of the client. No purchase or investment structure should be implemented based solely on information provided in this article and, in addition, home country tax advice should also be obtained before selection of ownership structure.
