Buying US Property
Non-US persons who purchase US real estate are faced with a variety of US tax issues when they buy the property. The main issue relates to the structure of ownership, as that in turn drives the US tax consequences. The answer will depend on a client’s particular facts and circumstances, so what suits one client may not suit another.
- Direct Ownership – in some cases there is nothing wrong with direct ownership. Key advantages are simplicity, absence of administrative costs and availability of preferential Federal capital gains rate. Key disadvantage is exposure to estate and gift tax. There is also a requirement to withhold tax from proceeds. Care needs to be taken where property is jointly owned
- Corporate Ownership – the key advantage over direct ownership is an exemption from estate tax, provided the offshore structure is properly set up and administered. Main disadvantage is the tax liability on sale due to the lack of the preferential capital gains rate
- Trust ownership – complex and costly to set up and administer but can, in the right circumstances, offer the best of both worlds; an estate tax exemption and access to the preferential capital gains rate on sale.
- Mortgage or no mortgage – in addition to the ownership structure consideration needs to be given to whether it is advisable to have a mortgage or not. Where the property is rented this will give rise to deductibility considerations for the interest paid and the structure of the mortgage could impact the extent to which the US taxable estate is reduced.