GI6: U.S. Tax Planning for Foreign Investors with Lance Lvovsky

Lance Lvovsky is a certified public accountant and cross-border tax specialist, based in Florida. Lance works with international clients advising them on real estate transactions, entity formation, income and estate tax planning for foreign investors.

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Announcer: Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host- Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles: Welcome to another episode of the global investor podcast. I’m your host Carillo. Today we have Lance Lvovsky. Lance is a certified public accountant and cross border tax specialist based in Florida. Lance works with international clients advising them on real estate transactions, entity formation, income, and this state tax planning for foreign investors. So how are you doing this morning Lance?

Lance: I am doing great. How are you Charles?

Charles: I’m doing well. And we met up on bigger pockets and I know you do a lot of work with international investors, which is especially what are our audience is interested in. And I had a couple of questions jumping right in with, in regards to various federal tax rules for foreign investors and how that works with US real estate.

Lance: Right. So at the very beginning, the federal tax rules for foreign investors can’t get quite complex. There are a multitude of rules and laws to be aware of. We have income tax. We have state tax. We have something called FIRPTA, which is upon the disposition of US real estate and so forth. So when foreign investors are acquiring US real estate, one of the first things they should be aware of is the income tax implications. And what kind of entity will they be acquiring today? Will they be acquiring the real estate in their personal name, in a trust, in an LLC or in a corporation? And depending on the kind of entity you’re acquiring, that will also dictate your tax implications. Furthermore, if you’re renting out property, then you also have an annual income tax filing obligation. So now we need to keep that in mind. If you’re acquiring the real estate in a certain entities such as an example, a single member LLC, then you have to file a separate information return every year, what’s called the form 5472 that’s not a tax paying foreign per saying, meaning there was no tax obligation, but it’s a separate informational return than the IRS wants to see upon upon the filing with your income tax return. And the other thing we want to keep in mind is the estate tax implications, even though are most likely classified under these state tax system as a nonresident alien upon their death, their US situs assets, which includes US real estate, may be subject to the US estate tax. So, and there are ways to mitigate that tax.

Charles: Now, how is US income tax, applicable to foreign investors when owning US real estate? So with, with withholding, and how is that all handled?

Lance: Sure. So for foreign investors, there are two types of tax that may apply on income. One is called FDAP, which is Fixed, Determinable, Annual or Periodic and I’d say flat 30% income tax rate on your gross income. So for an investor that is renting out proparty by default, they’re subject to this FDAP 30% tax on gross rents and they can not deduct any expenses. However, there is an exception and there is an election that I make with all my clients that are foreign investors and the election is to tax for investors of US real estate, make it effectively connected income. And what this means essentially is we are able to deduct all expenses. So typical expenses with a rental property are insurance, property taxes, maintenance, cleaning repairs, perhaps HOA fees and so forth. We’re able to deduct all those expenses and the foreign investors tax at the graduated rate system. In other words, the same rates that you, Charles and myself are subject to as persons living in the US.

Charles: Okay. All right, that makes sense. And what taxes are for foreign investors responsible on upon the sale of us real estates, not just on the income from cashflow, but once they decide to sell that asset.

Lance: Right? So upon the sale of US real estate, they may be subject to something called FIRPTA. FIRPTA was enacted years ago, and it ensures that the government gets their share of the tax upon the sale of the real estate, and they don’t have to effectively chase a foreigner down to pay the income tax. Now, FIRPTA does not apply in every case. As an example, if you hold the US real estate in a US LLC that has a multi-member LLC, which is taxed as a partnership, then FIRPTA does not apply. Instead, you have a different kind of withholding tax. It’s called section 1446 would holding tax at the partnership level, but if you’re holding the real estate in your personal name or in a revokable grants work trust or in a single member LLC, then you are subject to FIRPTA. And FIRPTA would holding is generally 15% of the gross sales price.

Charles: Okay. All right. Interesting. And how do you decide what entities structure? It’s correct for foreign investors. We need to develop a plan for them.

Lance: It’s getting an understanding of what the client’s goals are, is the first thing that we want to, um, we want to establish, you know, when it comes to entities structure, we look at it from both an income tax and an estate tax perspective. So for an example from an estate tax there, I mentioned earlier, there are ways to mitigate or even eliminate the US estate tax completely. And one such way is to acquire US real estate in a US corporation. But the shares are owned by a Foreign Corporation and foreigner owns the shares of the Foreign Corporation. This is plate blocker, entity type set up. And this can mitigate these state tax. Another way is to acquire real estate in an irrevocable discretionary foreign trust. But with that comes some on sites for an example, the grand tour of the trust. In other words, the person that is putting all the money into the trust to acquire the real estate, he or she cannot personally benefit from any of the annual rents or income. So there are some implications or downsides to keep in mind. You know, so it just having a conversation with a client, also getting an attorney involved to make sure that the best entity structures not only tax efficient but also legally sound and all the laws are being followed. And also I would say it depends on what state they are acquiring the property. And because in certain high state income tax states, it may make sense to even acquire the real estate in a C Corporation.

Charles: Interesting. Yeah. What are the tax withholding requirements for LLCs and partnerships, which I imagine are the most popular for owning real estate in especially, income.

Lance: Right. So a multi member LLC or a partnership, has to withhold taxes quarterly on, on the income. And so those that would holding has done onto the foreign partners and the way that’s is the partnership, either annualizes its income or has to prepare a projection, what their income may be. If they build, they’ll have the sale of one of their assets upon the sale. They’ll pay that additional quarterly estimated tax payment. But effectively a partnership, much like you US individuals have to, you have to pay you quarterly estimated taxes that are allocable to any foreign partners. So if you have a, an LLC that has, let’s say one domestic partner and one foreign partner, the partnership will have to calculate withholding on just the foreign partner.

Charles: Oh, okay. Okay. That makes sense. What’s the process for applying for a individual tax identification number? the ITIN.

Lance: So that process it, it takes a little bit of time. I’ll state that it generally can take as much as 12 to 16 weeks, but, um, there are ways to actually reduce that time and we offer a service for that, which I’ll talk about in a minute. But the process is you have to complete what’s called an IRS form w-7. With that form, it’s so, it’s not a long any attached to it. One of which for an example is either your original passport or a certified copy by your local government embassy office of your passport. But a lot of times the IRS will not accept that. And so tax payers are kind of forced to mail in their original passport overseas, which there is a way to also not have to do that as well. I’ll talk about that. Along with the w-7, you’d have to attach, a qualified form. So let’s say either an income tax return, which is your 1040-NR or a FIRPTA withholding tax return. So a lot of times when we’re doing ITIN for clients, we will, we’ll do it simultaneously with the FIRPTA withholding return, we’re able to attach it and so forth. My firm, we are what is known as a certified acceptance agent with the IRS. What this means is that we’re able to certify attacks, the pears passport without them having to mail it to the US or they, they hold onto their passport and this process is streamlined. What we do is we do an interview either via Skype or face time or um, whatsapp. We do an interview, we make sure the person that we’re interviewing as a person, the passport and so forth, we will certified all the documents. We’ll prepare the W-7, will mail everything to the IRS on the taxpayer’s behalf. And because we’re able to do this so efficiently and because we are a certified acceptance agent, we are generally able to do this in about half the time, half the turnaround time than had the person would’ve had done it themselves with the IRA.

Charles: That’s amazing. So they get to hold onto their passport for the whole thing, which is, I know you normally they have to send it in. I didn’t even know that was possible.

Lance: Correct. It, it is possible.

Charles: Now with the ITIN when opening up an LLC as a foreigner, the ITIN is what is required to get that. You’ll need to have an ITIN to open up that foreign, the domestic US LLC. Is that correct? Or does that get not even a requirement?

Lance: Generally it is up there, in the past I’ve been able to obtain on what a called EIN or Employer Identification Number without and ITIN recently the IRS changed their rules and it appears they are now requiring an ITIN but um, but that’s been as recent as this past June. So it’s been about a month and a half. When they changed those rules. They want to say about the ITIN because it does take some time, you know, it takes at least a month even if we do it, we have with a client, if you’re, if you know you will be selling real estate, make sure you start speaking to your CPA at least a month or two in advance cause you want to make sure you have sufficient time and once you are ready to trigger the sale, everything is lined up and you’re not forced to wait for, for the item or, or on your CPA and so forth.

Charles: Now the process for applying for the EIN, the Employer Identification Number, is that similar for a US person when they open up an LLC, how they can do that right online? Or is that more about in depth process or someone that’s applying with an ITIN and a social security number.

Lance: So if someone’s opening a US LLC and they already have an ITIN, it’s as simple as doing it online. So it will be just as simple as for you or myself and that is the ideal way. And we’re were able to obtain the EIN in just a few minutes. Um, if the person does not have an ITIN, then they need to fill out a paper form. But again, under the new rules, that’s not entirely clear, the IRS will process that EIN application.

Charles: Okay. So with the ITIN it’s a pretty quick process. They can do it right online just like any other US citizen. But, um, I mean they might not even be able to open it anymore with the ITIN depending on what with the IRS, I guess later on this year as you were saying. We’re, we’re both in Florida so it’s not applicable to properties here, but for an investor, there’s plan to invest into a state that had income tax. I know we touched on earlier, how does that work with withholding and have you worked with, uh, with clients that maybe are investing in New York or another state outside of Florida that required income tax or had income tax?

Lance: Sure. So most states in the US as you know, do have a state income tax. So when clients are owning US assets in states that do then in that state, they have to file a state income tax return. Depending on how they hold the property, if it’s an incorporation, it could be a corporate return or if it’s your partnership that it may be a partnership or an LLC income tax return. Every state has their own rules about what holding and how the taxes get paid. Some states will require you to just like the federal level, but they will require withholding to be done quarterly. Other states may not. But in general, before you decide to acquire properties in the state. Make sure you speak to your CPA what the state implications may be, what those state reporting requirements are. You don’t want to have, you don’t want to miss a potential state filing.

Charles: Yeah, no, I imagine not. We spoke about earlier about the estate taxes and I’m kinda touched on gift taxes, but with the changes with Trump and, um, how did that affect a state and gift taxes? And I imagine they’re gonna effect, as they affect US citizens the same as they would affect Fornes investors. Is that correct?

Lance: Yes. Um, they, they are affecting everyone. I’ll say they’re affecting US citizens, perhaps more not, perhaps they are affecting me more. So for example, under the new laws, US citizens haven’t have a lifetime exemption of 11 million, which is indexed for inflation. It’s on in 2019, it’s 11.4. In 2020, it’ll go a little bit higher because it is indexed for inflation. If you are not a US citizen and not a US domiciled individual, then your estate tax exemption is only 60 grand and that amount did not change under Trump’s new tax laws or otherwise known as the tax cuts and jobs act to be more upper. So with the US estate tax is as a non resident alien, your US real state may be subject to state tax and it’s very easy to how to pay it because your exemption is only 60,000. So what I was discussing at the very beginning is before acquiring the real estate, you want to make sure you’re speaking to your CPA and also your attorney and making sure that the entity planning is done correctly because there are ways to mitigate the state tax by using more advanced entity structures and using irrevocable discretionary trust and so forth. There are also ways where you can minimize the cost burden, if you will, the state tax. And what I mean by that, as you can also just obtain some a life insurance which can help fund any estate tax bill that arises upon the death. What interesting though is that the way the US gift and estate tax system works otherwise us as our wealth transfer tax system in the US the gift tax for foreigners or non-residents is his subject on all US tangible property. But for the state tax it’s not. So in other words, there may be opportunities, good plan from a gift tax perspective on reducing your potential estate tax bill.

Charles: So just without doing all the planning and everybody’s situation is different. It’s $60,000 just in, so if you have over $60,000, if you didn’t do the planning correctly, that’s what you’re going to be charged now is state tax on if it’s being transferred to someone after your death, is that, that’s really that I get that right.

Lance: Yeah. So at a very high level, if you are, you are you as a real estate, as 2 million you’ll pay, let’s effectively you’ll pay a full estate tax on that amount insured. There is a $60,000 exemption, but you’ll end up paying 40% on your US gross estate. But if you hold the real state in a corporation, I was saying US gift tax on an intangible property is not clickable. So perhaps it may make sense to gift shares. Shares are considered intangible property from a US estate tax perspective. All intangible assets are still taxable. And again, this is speaking strictly for foreigners. For Charles, for you and myself. For us, our worldwide acids regardless of the kind of asset will be subjects of the US estate tax, but we get a much higher exemption.

Charles: Right. Um, so that’s great. Yeah. So I mean definitely with that example alone, it shows how much you need to work with the CPA when planning to invest anywhere. But especially as a foreigner in the US what services is your accounting firm able to provide to foreign investors? I know we went through a few with doing the ITIN and some of the estate planning. What are the other normal services that you’re applying to your offering to foreign investors?

Lance: Sure. So besides the ITIN and the EIN and so forth, we can handle all tax compliance services. That’s preparing all require annual income tax returns, whether corporations, the partnerships, the individuals, we can prepare all annual informational returns such as the 5472 when it is required. We can prepare the FIRPTA withholding tax return or if someone qualifies for an exception to FIRPTA, which I know we didn’t really get to speak about it before, but there are numerous exceptions since to the withholding, we can prepare that certificate. From a tax planning perspective, we work with the client directly in helping them plan and making sure that their US investments are done and the most tax efficient manner possible. And yeah, I mean, you know, and, and I also want to say for a real estate since it, you know, we provide a full spectrum of services from accounting, bookkeeping, tax compliance, tax planning, audit as well, and so forth. So it’s full services from accounting and tax a to z.

Charles: What do you suggest the best first steps for foreign investors to take before and investing in the US and US real estate? So someone comes to your brand new looking to invest in the US from outside the United States.

Lance: Yes. So the first step that they should do, it sounds like they already did it. That’s coming to me and hopefully they’re coming to me well before they’re gonna make their first acquisition because we want to be able to have dialogue and plan in advance. And so one of the first things that generally needs to be done is obtaining ITIN and we’ll have discussion. Is there a triggering event per say that can help the tax obtain their ITIN? We want to discuss what kind of entity do we want to acquire the US real estate. Sometimes it makes more sense to acquire it, or let me rephrase that. Sometimes it makes more sense to have a simpler approach, just because not everyone needs a more, a complex entity structure, the more complexity there is generally the more expensive it is. And that’s not always necessary. I’m an advocate that when possible, let’s do it the simpler way. But again, a foreign investor is them coming to me. Um, and then I’ll, you know, I’ll be able to speak with their attorney as well. We want to make sure that we plan out their entity, their acquisitions and so forth and get an understanding what is their intent. Is there an intent to acquire a property to rent out annually? Is their intent to acquire a property that they will not run down and instead it’ll be their secondary residence here in the US well, let’s say it’s me, Miami for an example and the comments then here a few months, of the year. So there, there won’t be any income every year at where I’m getting at or is there a, tend to acquire a lot of buildings and, and warehouse and so forth. So depending on, I just give you three examples, depending on what their intent is that will dictate their ultimate tax plan.

Charles: Do you ever have to, obviously if they have the mind to invest in another country, they probably have CPA in their home country. Do you ever have to contact to work with them at all or I imagine there’s some go-between there.

Lance: Yes. So, there are times where I am in communication with the clients, or the taxpayer’s home country CPA, but also my firm Marcum, we are a member of what’s called the leading edge alliance. And so what that gives us access to our accountants from about, I think it’s about 120 countries. So we have deep resources and we actually have offices in China, Ireland, and the Grand Canyon. So, not only do we have some international presence, but in countries where we don’t have a Marcum office, we are a member of this alliance. And you know, if I need to have, if I need to understand Australian tax laws, it’s as easy as picking up, following up, giving them a call.

Charles: Oh Wow. So how can we learned more about you and your from learns?

Lance: Sure. So our website is I am also on Linkedin. So, I believe Charles, you may have that linkedin URL. You can also shoot me an email or give me a call. So my email address is my first name, [email protected]. And feel free to give me a call. I’ll give out my phone number. It’s a, hopefully this is not a bad idea, but it’s a, it’s (954) 320-8077. And so anyone that wants to talk more about what their us tax implications may be, we are always happy to have a chat and see what ways we may be able to help you.

Charles: Right, and for all global investors. Listeners, I’ll put all that in the show notes and it’ll be on the podcast show notes and also on the youtube show notes. So no need to take that all down right now. So well Lance, I really appreciate it. Thank you very much for being on the show and you provided a ton of value to my listeners and if we have any questions, what I will do is we’ll reach back out to you and yeah, look forward to so I mean up with you in the future.

Lance: Awesome. Thank you. I enjoyed this and looking forward to seeing you soon.

Charles: All right, thanks Lance.

Lance: All right, take care.

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About Lance Lvovsky

Lance Lvovsky is a certified public accountant and cross-border tax specialist, based in Florida. Lance works with international clients advising them on real estate transactions, entity formation, income and estate tax planning for foreign investors.

Lance will walk you through the process of obtaining an Individual Taxpayer Identification (ITIN) and Employer Identification Number (EIN) for your US investment entity. His firm handles all aspects of tax related matters for foreign investors from FIRPTA withholding to estate and gift taxes.

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