An individual investor taking ownership of U.S. property via an LLC limits their exposure to liability and is considered a disregarded entity for tax filing purposes. The non-resident investor files an individual U.S. income tax return, Form 1040NR. Income and capital gain is taxed at the more beneficial individual income tax rates.
There are disadvantages:
- Increased costs in the setup and maintenance of the LLC
- The authorities in the investor’s home country may not consider the entity “disregarded” and tax the LLC as a corporation thus disallowing a tax credit for any U.S. income tax paid as an individual
- Does not solve the U.S. estate tax issue
- When purchasing multiple properties the investor may like to consider owning each property in separate LLCs to avoid exposing the entire portfolio. This does, of course, increase any fees associated with setting up and maintaining the LLC’s including annual report filings as well as quarterly filings to the IRS for each entity where required.
The LLC is required to have an Employer Identification Number (EIN), register with the Department of State, engage the services of a registered agent present in the state where trading and file an Annual Report.
To LLC or not to LLC?
An individual taking ownership of U.S. property via a disregarded LLC in the U.S. limits exposure to liability. In addition, the IRS sees through the disregarded entity so income and capital gain is taxed at the more advantageous individual rate rather than as a corporation – single member LLC.
LLC stands for Limited Liability Company. It is not a partnership nor a corporation and the owner or owners are referred to as members. An LLC offers protection as members cannot be found personally liable for company debts. Their assets cannot be seized as they are separate from the assets of the LLC.
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.
Non-resident buyers considering the LLC option should take advice before proceeding, as the tax authorities in their home country may not take the same view as the IRS. In some cases; this results in the owner being taxed as an individual in the U.S. and then again as a corporation in their home country.
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.