Held by Foreign Holding Co.
Some Alternative Methods for Foreign Investor to Take Title to U.S. Residential Real Property
BENEFITS AND BURDENS OF SOME
ALTERNATIVE METHODS FOR A FOREIGN INVESTOR TO TAKE
U.S. RESIDENTIAL REAL PROPERTY
U.S. Residential Real Property held by a FOREIGN HOLDING COMPANY
- U.S. Income Taxes. The branch profits tax is not a problem for foreign corporations that are not engaged in a U.S. trade or business and who exit the U.S. in the year of sale of the real estate.
- U.S. Gift Tax. Future transfers by nonresident aliens of intangible property (namely, shares of stock) are not subject to U.S. gift tax.
- U.S. Estate Tax. Shares of Stock in foreign corporation are excluded from U.S. estate tax upon death of non-U.S. shareholders.
U.S. Income Taxes.
(a) In General. The use of an underlying foreign entity creates potential U.S. income tax problems to any U.S. beneficiary on the death of the foreign shareholder.
(b) Federal. If the foreign corporation generates rental income, its effectively connected earnings are probably going to be hit by the branch profits tax (IRC § 884). This imposes a tax on the after-tax business income of foreign corporations engaged in a U.S. trade or business. The tax is imposed whether or not a dividend is paid to the shareholder. Usually the only way out is for the profit to be reinvested in the trade or business.
(c) California. If property is located in California and earns income or is improved, then California could impose a minimum franchise tax.