We hear from foreign investors all the time on business structures, and particularly, what the best business structure should be.
In many cases we recommend something called a flow-through structure, which in the US is either a Limited Partnership or a Limited Liability Company. Both of these are characterized by the fact that they do not pay taxes on their income directly. Instead, after income and expenses are calculated, the net profit or loss is ?flowed-through? to the owners, and is actually reported on each owner?s individual tax return. That means the tax rates actually paid on the entity?s income can vary, as the owners may easily be in different tax brackets.
Most of the time the flow-through tax structure is the best for investment property. This is due to the nature of the income, and how it is treated by the Internal Revenue Service, the US tax authorities. The IRS looks at investment income as passive in nature. You will have an income tax obligation on your regular profit, and also on any gain from a sale of the property. However, your tax rate will be lower than it would if you had earned that money working for someone in the US.
Then there are times when this flow-through income model does not work. In particular, the flow-through model is not the best for you, as a foreign investor, when you are buying real estate with the specific intent of turning around and reselling that property. The income generated from buy-sell activities is not passive income. It is active, or earned income. Plus, the profit you make on a sale is not taxed at a lower capital gain rate. Even the profit on these buy-sells is taxed at the active, or earned income rate.
With active income, we recommend a different strategy. The flow-through plan won?t necessarily work here. It?s better here to go to a corporation tax plan for several reasons. This is especially true if you are not planning on taking the profits out of your US company, but want to re-invest them into additional real estate.
So when you are talking to us or your own advisors, make sure you are clear on what your property investment goals are. If you are buy-and-hold for a long time, the strategy is quite different from those who are buy-and-resell focused.
The US tax and legal system is complicated. That?s why you need a powerful and knowledgeable ally. With LegalShelfCompany.com, you don?t have to worry. We can help you through the tax, legal and other requirements to holding and operating US property from overseas. To learn more, contact us at info@legalshelfcompany,com. You can also pick up our free eBook, Buying US Real Estate: What Foreign Investors Need to Know and watch our FREE webinar at www.legalshelfcompany.com/international .
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