Friday, August 25, 2017

U.S. Estate Planning for Non-U.S. Persons - Nonresidents With US Property

By Kyle Lodder, CPA


Estate planning is often a forgotten element when non-U.S. persons plan their investment into U.S. real estate or business expansion into the U.S. As a result, many non-U.S. persons are unknowingly exposed to U.S. estate tax or other related land mines in connection with their U.S. investments due to incomplete planning focused on the corporate and/or personal income tax consequences. However, estate planning is an important piece of the puzzle and should not be forgotten when planning the investment or business expansion into the U.S.

For U.S. estate tax purposes, a “U.S. person” is an individual who is either 1) a U.S. citizen, or 2) domiciled in the United States. A person acquires U.S. domicile by being physically present in the U.S. and establishing intent to reside in the U.S. permanently. Citizens of other countries who aren’t domiciled in the U.S. are considered to be non-U.S. persons for U.S. estate tax purposes.

The U.S. federal estate tax is a “net worth” tax, based on values at the date of death of a non-U.S. person who owns U.S. situs property. U.S. situs assets are such things as:

  • U.S. corporate stock, even if held in a brokerage account outside the U.S. (e.g. Apple stock held in your brokerage account in the UK)
  • U.S. mutual funds
  • U.S. pension plans and annuities, including 401(k) plans and IRAs; and
  • Debt obligations of U.S. individuals, corporations, partnerships, trusts, or government.
  • U.S. real property (e.g. vacation or rental home in the U.S.)
  • Tangible personal property located in the U.S. at death (e.g. car at your vacation home)

For non-U.S. persons, $60,000 of U.S. situs property is exempt from U.S. federal estate tax. This amount is considerably less than the annually inflation-adjusted $5.49 million exemption allowed for U.S. persons. Any assets in excess of the $60,000 exemption are taxed at graduated rates between 18% and 40%.

However, the executor of the decedent’s estate should consider whether the U.S. has an estate tax treaty with the decedent’s country of residence at time of death to capture additional tax savings.

Here are several planning techniques that could be used to reduce U.S. estate tax exposure. This list is not an exhaustive list, but some planning considerations.

  • Consider gifting assets directly or in trust (to spouse, children, family) to reduce taxable U.S. estate and to shield future growth from estate tax.
  • Consider the advantage of basis adjustments when passing appreciated property to heirs at death.
  • Consider liquidating foreign stock portfolio of U.S. stocks prior to death to avoid U.S. federal estate tax.
  • Obtain a non-recourse mortgage on U.S. real property to reduce value of real estate subject to U.S. tax.
  • Consider purchasing life insurance to pay for possible U.S. estate tax.
  • Consider holding the U.S. situs property through a foreign entity such as a foreign corporation or foreign trust.
  • Sell the U.S. situs property prior to death. There would be income tax in the U.S. and country of residence, but foreign tax credits should be available to prevent double taxation.

Inadequate U.S. estate planning can result in many unpleasant surprises. Here is a non-exhaustive list of items to watch out for:

  • The impact of nothing having a Will in place or the Will doesn’t govern the assets in the U.S. This can result in either 1) complications for the executor administering the estate, along with conflict amongst the heirs, 2) difficulty processing the estate through the U.S. courts, or 3) inefficient U.S. tax consequences.
  • Several U.S. states have estate tax and/or high probate fees. States don’t typically allow tax treaties to be used to avoid or reduce estate tax.
  • Sound estate planning in the country of residency, but may actually be poor estate planning in the U.S. due to differing tax laws. Collaborative estate planning is the multiple jurisdictions is prudent.
  • Failure to consider the U.S. gift tax, as it often is a significant different taxing approach compared to the country of residency. For example, gifting U.S. real estate to heirs results in U.S. gift tax but often results in a deemed disposition capital gain in the country of residency. The different types of tax may result in the inability to claim foreign tax credits to avoid double tax on the transaction.
  • Failure to consider tax implications of heirs who are U.S. persons.
  • Failure to consider the title of certain assets. The way an asset is titled can have varying impacts on the administration of the estate.

Estate planning is quite dynamic. There are many considerations in making a prudent estate plan that meets one’s desired legacy goals. There isn’t a one-size-fits-all solution. Planning to mitigate the U.S. estate tax implications is an important piece of the puzzle. The non-U.S. person who holds U.S. property is well-advised to enlist the guidance of a qualified U.S. International Estate Planning specialist.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help non-U.S. persons owing U.S. property with their estate planning needs.


The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

Nonresidents Doing Business in USA - The Legal and Tax Rules

By Kyle Lodder, CPA

The United States continues to be a large and stable economy and an attractive destination for non-U.S. companies to expand and grow their business. Even though it’s an attractive market for businesses to penetrate, foreign business owners often experience difficulty navigating the complex tax, legal and regulatory rules.

Therefore, it’s critical that one engages a qualified team of advisors as one enters the U.S. market. Proper planning will help avoid unexpected consequences and allow the business owner to preserve his or her time, money and mental space.N
A foreign corporation engaged in a trade or business in the United States is taxable on U.S. sourced business income. The activities need to be “considerable, continuous, and regular” to rise to the level of engaged in a U.S. business. The definition is quite broad that many companies with sales in the U.S. fit into this category.

The federal corporate income tax rate is comparatively high amongst westernized countries. Taxpayers reach the highest marginal tax rate of 35% at only $100,000 of corporate net income. As such, tax planning and entity structuring is a critical component of the planning for businesses expanding into the U.S.

A partnership is an option to reduce U.S. federal income tax. In this type of entity, the income is taxed at the individual partner level and not with the partnership itself. Individual partners pay tax at the individual income tax rates, which are significantly less in comparison to corporate income tax rates.

The partnership is required to withhold tax on behalf of the foreign partners. The withholding tax is quite high as its equal to the partners’ highest marginal tax rate multiplied by the foreign partners’ share of business income. The foreign partners are able to have much of this tax refunded when he or she files a U.S. income tax return. However, the drawback to this approach is the significant withholding taxes required which can cause a cash flow crunch in the business.

The U.S. federal estate tax should also be considered in the entity structuring planning. Business ownership through a foreign corporation is a technique to avoid attribution of the estate tax upon death to the non-U.S. business owner.

Sometimes a U.S. subsidiary corporation of the foreign corporation makes sense. This approach can provide enhanced flexibility to mitigate U.S. taxable income and to facilitate the repatriation of funds back to the home country. Various techniques are implemented with this structure, such as the use of intercompany loans with an interest charge, management fees or dividends. With this approach, careful professional guidance should be sought to avoid anti-abuse provisions within U.S. tax law.
Perhaps the most attractive option to mitigate the comparatively high U.S. federal corporate income tax is to take advantage of the income tax treaties between the U.S. and its trade partners. A list of the income tax treaties can be found here: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z. Most of these treaties include a taxpayer friendly provision which says that business profits of a foreign corporation are only taxable in the United States if they are attributable to a Permanent Establishment in the United States.

Permanent establishment typically includes a place of management, branch, office, factory, workshop or an agent who habitually exercises an authority to conclude contracts. A warehouse does not constitute a permanent establishment.

As such, the treaty may result in a foreign corporation only being subject to income tax in the foreign country and not subject to U.S. federal income tax. A federal income tax return would still be required to claim the benefits of the treaty. If the treaty-based return is not filed, the Feds can potentially impose federal income tax on the gross income earned in the U.S. without the benefit of any business deductions.

Yet, state tax compliance may be the most important tax issue to foreign businesses expanding into the U.S. States generally don’t follow federal tax laws or treaties. There are 13,000+ state and local jurisdictions in the U.S. that impose taxes on businesses. Each jurisdiction has their own set of rules and nexus standards. Nexus is defined as the minimum presence in a jurisdiction subjecting the company to tax in that given state or local jurisdiction. Oftentimes, companies with no physical presence in the U.S. can avoid U.S. federal income taxation through a tax treaty, but are still subject to state tax since the nexus standards are met.

There is not a one-size-fits-all solution for each non-U.S. business expanding into the United States. Tax is a critical consideration and proper planning can save thousands, even millions, of dollars and avoid many head-aches and pitfalls. It’s prudent for business owners to surround themselves with a qualified U.S. international tax professional to help navigate the complex rules.

This communication contains general information. Each individual investor should discuss their specific situation with a professional advisor before deciding on any investment structure.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help Canadian investors weigh the benefits and risks associated with the different investment options.


The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.

Foreign Nonresident Investment in US Real Estate - The IRS Tax Rules

By Kyle Lodder, CPA


The purchase of U.S. real estate has been a long-time attraction for non-U.S. investors, often due to purchasing beautiful property at stable market prices.

Careful planning should be done before acquiring U.S. real estate in order to avoid unexpected tax consequences down the road. Among the items that should be considered are:
  • The expected use of the property (primary residence, vacation home, rental property, investment property, development property or a combination of these uses),
  • Citizenship and residency issues,
  • Use of a corporation, partnership or trust for holding the property,
  • Tax issues in both U.S. and resident countries, and
  • The ultimate disposition of the property

Individuals who are not U.S. citizens and not U.S. residents are considered to be nonresidents for U.S. tax purposes. If an individual does not have a U.S. green card and spends less than 120 days in the U.S. annually, generally such a person will be a nonresident.

Nonresidents are subject to U.S. taxation only on their income sourced in the United States. If a nonresident purchases U.S. real estate and uses the property for personal use only, he or she is not required to file a U.S. income tax return in any year except the year of sale. If the property is used as a rental, the owner would be subject to tax on the rental income earned, and tax returns would be required even if there was a net loss from the rental activity.

When a nonresident chooses to sell U.S. real property, the gain from such a sale is usually subject to capital gains tax in the U.S. (capital gain treatment is generally not available to property developers). Currently the capital gains tax rate for nonresidents is 15 - 20%, although the gain may be completely tax-free if the gain from sale is minimal.

Withholding tax of the gross sales proceeds, typically in the amount of 15%, may be required upon the sale of the property. This withholding tax may be exempt, reduced or eliminated in certain situations. Any required withholding tax is credited against the federal tax liability computed on the nonresident federal income tax return.

If a nonresident were to die while owning U.S. real estate, the value of the real estate in excess of $60,000 would be subject to U.S. federal estate tax. Certain credits and treaty provisions exist to decrease the burden of this tax. Potential U.S. estate tax is a risk which must be properly weighed.

State taxes should also be considered. Many states impose an income tax, withholding tax upon sale and an estate tax. If a property is used as a rental, the nonresident will be required to file and pay state income taxes in addition to the federal taxes.

When considering purchasing real estate, the foreign investor should consider the use of a corporation, partnership, or trust as an entity type to own the property. There are advantages and disadvantages for each entity type, and the pros and cons need to be explored.

Owning U.S. realty through a foreign corporation generally shields the nonresident owner from the U.S. estate tax. However, corporations do not have the benefit of the lower preferential capital gain tax rates only available to individuals and certain trusts, and any gain from the sale of the property would be subject to corporate tax rates (currently a 35% maximum rate).

The use of a foreign or U.S. partnership to hold U.S. real estate may also be an option for certain foreign investors. The gain on the sale of real estate held by a partnership would be taxed to its individual partners at the lower capital gain tax rates. In certain circumstances though, the ownership of real estate through a partnership could potentially still leave the foreign owner exposed to U.S. estate tax.

Although the use of a U.S. limited liability company (“LLC”) is a common entity type for U.S. persons to own real estate, it can be advisable for foreign investors to steer clear from owning U.S. real estate through an LLC. This entity structure is generally tax inefficient due to differences in the U.S. and foreign tax law. This is especially true for Canadian investors.

Certain trusts can offer the benefits of the lower capital gain rates upon the sale of the property, and shelter the beneficiaries from U.S. estate tax. Such trusts must be foreign irrevocable trusts and require strict limitations on ownership and use of the property. This option is less desirable for many investors due to both giving up control of the property along with the complexity and administrative hassle of the arrangement.

There is not a one-size-fits-all solution for buying U.S. realty. Each investor is unique requiring balancing of many factors, including the owner’s intended use of the property, duration of ownership, plans for future disposition, and legal liability.

This communication contains general information. Each individual investor should discuss their specific situation with a professional advisor before deciding on any investment structure.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder at 360.599.4340 or kyle@loddercpa.com. Kyle Lodder is a Certified Public Accountant and is the owner of Lodder CPA PLLC, a U.S. international tax firm. Kyle has the experience and knowledge to help foreign investors weigh the benefits and risks associated with the different investment options.


The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Lodder CPA PLLC assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.