Jason welcomes Chris Picciurro on the show to talk about taxes. He is the co-found of Integrated Financial Group as well as a CPA. He specializes in taxes for non-resident and non-US citizens looking to purchase property in the United States and he also has some great advice to give for US citizens looking to purchase overseas. On the show, Jason and Chris break down some of the complicated tax laws that are only applicable to non-residents such as estate taxes, withholding tax, and much, much more.

Key Takeaways:
3:00 – What are some things foreigners need to consider when purchasing a property?
8:10 – Foreigners would have to file a 1040nr.
14:30 – As a non-resident you’re only allowed to transfer $60,000 worth of assets, but there are ways around this. Chris explains.
23:15 – Chris explains what a tax treaty is.
25:10 – In this segment Chris goes into what US citizens need to know when buying property overseas.
28:30 – When US citizens move overseas to work, you get a foreign income exclusion of $100,000.
31:40 – If your entity made money and you did not take that money out, would you still have to pay taxes? Chris explains.

 

Tweetables:
“The transfer of assets, the thresholds is over $5 million for US residents. For non-residents, it’s $60,000.”

“If you’re going to buy property in the US, consult a CPA to make sure that you can avoid all the tax withholding.”

“If you’re working aboard, you can exclude almost $100,000 of your income.”

 

Mentioned In This Episode:
http://www.integratedcpa.com/
http://nta.integratedfg.com/
Tweets by PiccCPA

 

Transcript

Jason Hartman:
It’s my pleasure to welcome Chris Picciurro to the show. He is the co-founder of Integrated Financial Group and they are located in Detroit and today we’re going to talk about sort of two parts of taxation that are very important. One is when non-US citizens buy real estate in the US and then time permitting we also want to talk about US residents living overseas and some of the important tax reporting and implications there for them. So, Chris, welcome, how are you?

Chris Picciurro:
Hi Jason, I’m wonderful. How are you doing today:

Jason:
Good, thanks. It’s good to have you and you’re coming to us from Detroit, Michigan is that correct?

Chris:
Today we are outside of Detroit, Michigan and finally have some beautiful weather here.

Jason:
There you go. Tell us about some of the considerations. My real estate investment company has a lot of foreign investors that buy US real estate, US real estate has always been very attractive to foreign buyers because of the rule law, the relative stability of the markets, the MLS system which really makes it a place where it’s easy to get to data, you know, there’s a consistency to the data so people can feel pretty comfortable that they know what a property is worth before they buy it or invest in it. There’s just a lot of things, customs, you know, that are relatively standardized around the United States and that gives foreign buyers a really big comfort level.

We have buyers from all over the world, Asia, Australia, New Zealand, Europe, just, you know, Middle East, everywhere, South America, everywhere, coming to the US to buy properties in different areas around the US, so this is a big issue and, you know, they commonly ask us about what tax considerations do they have. How do the US government deal with them? Of course, their home countries there may be a whole different set of things that we probably can’t address, because that is so varied, but let’s talk about that a little bit. What are some of the things, Chris, they need to consider?

Chris:
Well, you hit the nail on the head. Foreign owners investing in the United States is becoming much more prevalent especially in the last years with our currency getting devalued. For a foreign owner, the quality of our construction and our construction codes are much higher than it might be in their home country and the stability of our government might be a lot better than in their home country. So, just taking a step back, I’m a CPA and one of our specialty areas is assisting non-US residents that purchase property here in the United States.

We’ve been blessed enough to work with clients in over 40 countries. You also made a good point as to say those owners or investors will typically have to do research on their home country on how it is, how implications of owning real estate here is handled there. A lot of it on our end or in the United States end, has to do with the tax treaty of that particular country and the more friendly the tax treaty, the more prevalent that investment has been here.

For instance, Canada, the Netherlands, the UK, Australia. We’re getting a lot of clients from those countries. A lot of those countries also allow you to take your retirement savings, just like you could do with a soft directed IRA here in the United States and purchase US property with those retirement savings. In Australia, there’s the super fund and the pension schemes in the UK for those type of things.

First of all, one would have to consider how they’re going to fund their venture, because it is tough to get a mortgage on investment property here in the United States, it’s even tougher if you’re a foreign national. So, let’s assume you have to be a cash buyer.

Jason:
Let me just say one thing about that if I can, Chris. It’s a lot easier than it is in probably their home country, because the US has the most highly developed mortgage market in the world. For all its flaws and the scams perpetrated by Wall Street and all of their financial innovation, if you will. I mean, the mortgage market here is so highly developed and foreigners usually can’t do the conventional financing thing in the US, but there is a lot o choices for them. Well, not a lot, but there are definitely choices in the hard money and private lending world. We offer it through my company. Go to Europe and try to get a mortgage, go to Argentina, you know, good luck, there’s not much available.

Chris:
There are some tax benefits, something called mortgage interest inclusion where if a US non-resident lends money and has mortgage income here in the United States that they may not have to pay tax here in the United States, but as far as getting back to your question, one would would consider objective of their investment. Are they looking for capital appreciation or are they looking for income? Are they looking to diversify owning single family versus apartment complex and commercial property or are they looking to diversify owning in different types of cities and markets?

We’ve seen, at least in the single family sector, what I call the rust belt, would be your Detroit, Cleveland, Indianapolis, Kansas City, those markets, very, very hot. Five/six years ago, it was the hot markets that were hot. The Orlandos, the Phoenix, Atlanta that were more prominent for the single family sector, but I would say someone would consider what their objective is with the property and how is that property going to be managed? Most of the investors that we see want a more turn key approach, because obviously they have a significant amount of assets, most of them, and they’re living in their home country.

Some of them might have children that came to the United States to go to college, so maybe they can help them manage the property, but a lot of times they want to be comfortable with someone who’s managing the property. So, those are all considerations that you have to think about before you’re purchasing property here.

Jason:
Sure, absolutely. Okay, so what about the tax issue though? How does the US government treat foreign investors?

Chris:
Sure. Well, they treat them very friendly. So, if you’re a foreign investor, you need to consider is what type of entity you’re going to be. Are you going to purchase the property, own it in your own name or are you going to purchase a property and form a Limited Liability Company here? Are you going to purchase a property and form a corporation or a trust here or have an offshore trust? So, first thing to consider is entity structuring. Let’s keep it simple and let’s assume somebody purchases a property in their own name and let’s say they form a single member LLC and put it in the LLC’s name. So, for federal tax purposes, the single member LLC is the disregarded entity.

Those investors instead of filing, like we file as US residents here a form 1040 every year. They would file a 1040nr or non-resident return and in that return they are still are entitled to all the deprecation deductions that you get by owning a property, they are entitled to the mortgage interest if they do have mortgage interest, the real estate taxes, management fees, and that sort of stuff. So, a rule of thumb and this is a big saying everyone situation is unique, but a rule of thumb is typically you’re going to pay only about a 5% tax on whatever your gross rent in after you deduct all of these deductions and then we have a lot of foreign owners that we work with.

Let’s say they buy an apartment building for $2 million. It doesn’t even have to be that much, it could be a $500,000. At that point that owner might want to consider doing what’s called a cost segregation study on that property and in that case, a special company would come in that’s engineering and CPA based that would take a look at the building and break down costs of the building to furniture, fixtures, doors, that way you’re not..

Jason:
Air conditioning units, you know, yeah, things that can be deprecated on the faster schedule, but you mentioned I think a price range there, what price range did you say was the investment size that it starts to make sense for cost aggregation analysis?

Chris:
Oh, for the cost segregation? Typically $500,000 or more is where it’ll make sense.

Jason:
So, that’s not going to be in our world a single family property, because we would never recommend expensive single family properties like that. However, it could be an apartment building and that can make sense, but just on little single family home properties that might cost $80,000 each for example, you can cost segregate yourself on a few things like your obvious things. I don’t think you’ll need to hire a firm and do a big study and have a report, you know, you can do the appliances. A lot of these properties have stoves and refrigerators, things that aren’t provided by the tenant, they’re actually owned by the owner. When I said that, I didn’t mean to imply that some of our properties don’t have stoves. They all have stoves and that’s almost always provided by the owner. So, the appliances can be deprecated I believe on a seven year schedule, is that correct?

Chris:
Exactly. So, potentially you could have what’s called Section 179 or immediate deprecation on that property. In the single family homes space, typically if someone purchases $250,000 worth of homes in a market, it might be worth having a residential cost segment company come in and do that work for them.

Jason:
Because they could do it on several properties at once.

Chris:
Exactly, they’ll come in and do that. I think that, you know, those studies are a lot less money, because there’s a lot less breaking down of items on a residential property. So, there’s one cost segregation company that we work with that does do residential properties and pretty much break even is $200,000 to $250,000 worth of investment regardless if it’s one nice condo for that much or home or maybe four or $50,000 homes.

Jason:
Right, exactly. Let me just explain to the listeners, I know everybody listening is at completely different levels, but deprecation is the holy grail is tax benefits. Income property is the most tax favored in the United States and the IRS allows you, if you qualify for it, to take deprecation deductions and there are, if you think you don’t qualify and you’re listening, there are some ways you may be able to qualify. So, that’s talked about on many prior episodes of the podcast where I interview CPAs and they talk about the possibility of becoming a real estate professional, etc, etc.

So, we won’t go into that here in any detail. However, this is something you really want to take advantage of and what our guest is mentioning is why you want to cost segregate is because if it’s a single family home, for example, and that’s an investment property, your deprecation schedule is 27 and a half years, but if you can accelerate that on certain components of that property like we talked about the appliances where you can deprecation those on a seven year schedule, you get more tax right off and more tax benefit quickly rather than waiting and deprecation over a longer time frame. So, that benefits you now because the time value of money, you rather have money today than money tomorrow.

Chris:
Right, you hit the nail on the head, Jason. So that is, you hit the nail on the head again where investment property is the holy grail of the tax code because you’re getting the deprecation deductions and if you structure it properly is if the assets are inherited by somebody else, you get a complete step up in basis, you basically get to reset the clock to current market value instead of deprecating it all over again, which is another advantage.

So, yeah, the cost segregation studies are an opportunity for non-residents. We’d have to look at the code and we have to look at the treaty of what country they’re in and most importantly, what their objective is. The objective of the owner has to be considered, we don’t live our lives on paper or else we’d know who would win every sporting event possible.

So, one thing to consider also is and, it’s often overlooked, are the gift tax implications for non-residents purchasing property here. The gift and estate tax and what I mean that is, if you’re a US resident and you pass away, I call up the government’s exit fee, right, you can pass away with a little over $5 million of assets and your beneficiaries will inherit those assets tax free, the asset transfer tax.

Now if those assets are in an IRA or annuity, you have to take them out of an annuity, they might be tax implications, but I’m just saying the transfer of assets, the thresholds is over $5 million for US residents. For non-residents, it’s $60,000. That’s a big concern when someone has a portfolio of half a million dollars and they pass away, there could be a $150,000 to $200,000 estate tax implication. So, there are ways to work around that, there are planning tools that we can use. We get attorneys involved either using a term life insurance, which is not consider part of their US estate if you’re a non-resident. You can potentially use a trust or make corporation elections.

Again, I know we’re going in a different direction, but my point being for the listeners, if you’re a non-resident of the United States and you’re buying property here, consider your estate tax and your planning and make that a factor. I always say, don’t let the tail wag the dog, right. So, we don’t want the estate tax..if you’re looking for more income to affect what you do as far as purchasing things, but I think it needs to be considered when you’re looking at your overall situation.

Jason:
Right, right. Yeah. Good point and in let’s not let the tail wag the dog, but let’s consider the tail of the dog.

Chris:
Exactly. We don’t want the tail getting stuck in the door, because what happens if you’re property heavy and you don’t have a lot of cash here and something happens to you, you’re not going to be able to afford to pay the exit fee or the estate tax for non-residents. You might have to sell the property in a distressed fashion.

Jason:
You mentioned something early on in our interview, you alluded to the concept of the foreign buyer coming in to the US to invest in US real estate, but they would form an entity and I know a lot of overseas prompting going the other direction suggest that American form entities when investing overseas. Now, a lot of Americans here though, when they buy across the United States, they just buy in their personal name and make sure they have good insurance.

So, the asset protection issue is not, you know, it’s not a huge issue in the traditional residential real estate business from a property threat perspective. In other words, we’re liability would be created in the property, the internal threat as it’s known, you know, the tenants slipping and falling and suing you. If you have good insurance, you’re in pretty good shape there as long as you make sure your policies never lasp and such, but does a foreign buyer in the US need to form an entity to buy? Is there a reason you mentioned that? You sort of mentioned it sort of matter of factly like of course that’s what someone would do.

Chris:
Well, you don’t need to do that. It’s not a requirement. Typically the reason you would form an LLC is one asset protection, which we already discussed, which again, it might not be a concern for somebody. The ease of banking is going to be, if you have an LLC with a federal ID number, it’s going to be a little easier to bank here in the United States. It also allows you the opportunity to make a special tax selection at any time and have your LLC elect to be taxed as a corporation. What that means is that if you have an LLC and this is true for residents also, an LLC can, what we call, check the box for tax purposes.

The first 75 days of any calender year and you’d like to be taxed as a corporation. That plays a role when you talk about state tax planning, because the advantage of owning your property in a corporation if you’re a non-resident is that you’re avoiding estate tax or you’re attempting to. So, those are some of the advantages of forming an LLC here, but it’s not required at all.

Jason:
Okay, so what happens with estate tax around the world? Of course, there’s too many countries to even begin to address this, but in the US we have and have not have estate tax. What is the consideration there when you talk about foreign nationals buying in the US? Are you talking about US estate tax that they’d be liable for? You talking about tax in their home country?

Chris:
Great question. It’s the US estate tax that they might be liable for.

Jason:
Even though they are a foreign national, they still have US estate tax?

Chris:
Correct, if they have real property here they have what’s called US site assets, so yes. A bank account here is not consider a US site asset. A term life insurance policy, the proceeds from that is not considered US site assets, but the property is.

Jason:
The problem with those things is neither of those are really very good investments or could be considered investments, but the property can be. So, what do we want to do with the property then?

Chris:
Well, we would call an attorney that specializes in the estate tax piece of the tax law and typically what happens for your larger investors is they might form a trust that owns the LLC. They might have an elect to be taxed to the corporation, they might create a British Virgin Island entity to hedge against the estate tax. So, there’s a lot more advanced planning tools available to them that we would collaborate with in an estate planning attorney that really knows their stuff, but if someone is coming in and buying one or two properties, it’s probably not a concern of theirs, but it is something to consider.

Jason:
Any mind fields here that you want to avoid?

Chris:
Sure, there is one big one. So, the reporting requirements, again, they need the non-residents going to file most likely a 1040nr, they’re going to get an ITIN, which is an identification number for the IRS. US residents are citizens, we have social security numbers. So, we need it, the government needs a number to identify them as and ITIN are not always easy to obtain for some reason. One of the other managing partners at our firm always chuckles and says, “The US government should be giving them out like candy, because it’s the only way they’re going to identify these foreign nationals.” But, you have to get an ITIN number, which again, I recommend you using it with what’s called a certifying acceptance agent.

We are one of those, but there are a lot of quality certifying acceptance agents in the United States that can expedite getting the ITIN and the issue is if you have residential property that’s getting rented out or commercial or for any property for that instance that’s getting rented out, if you have a property manage that’s managing that property for you. They are considered what’s called a paying agent and they’re required to withhold 30% of your gross rent as a tax withholding unless you have some forms on file with them, meaning an ITIN and you make a special tax selection called effectively connected income tax selection.

So, again, the pitfalls are, if you’re going to buy property here in the United States, consult a qualified CPA to make sure that you can avoid all the tax withholding and make sure you work with a quality property manager and make sure all those forms are on file before you start renting the property out, because we wouldn’t want..so sometimes the owner, they buy the property, they realize concerning they rent it out and then all of a sudden, they get notified they’re are subjected to this 30% withholding and that’s not good look for anybody. We want to avoid that like the plague.

Jason:
Yeah, of course we do. Okay, good. Anything else?

Chris:
I think on that side, no. I think that covers most of the basics. Obviously, we did touch on US residents purchasing property abroad.

Jason:
Right and that’s what I wanted to do is switch gears onto that topic a bit. So, of course, this is another big whole topic area and there’s a lot more detail than we’re going to have time to address here, Chris. We should say to the listeners we’ve addressed this quite extensively on other shows, but I would love to hear your perspective on it, but before we jump into US residents buying property abroad. I just want to ask you to define for the listeners a term that is commonly used that I think some people may not really understand and that is tax treaty. What is a tax treaty exactly?

Chris:
Sure. What a tax treaty is the governing document that our government and the foreign government agree on is how they’re going to handle cross border transactions and how they’re going to handle residents of their country either doing business or visiting or investing or working in the other country and some of them are friendly, some of them are not friendly. So, that’s kind of what a tax treaty is. They’re very lengthy and depending on the tax treaty that might dictate how attractive it is for someone another country to invest here including corporations and vice verse.

Jason:
Yeah, okay. Makes sense. I have a feeling a tax treaty will certainly serve one person and maybe to cure insomnia.

Chris:
Oh, exactly. Exactly. I don’t know how people sit and read them all the time. I’ve looked at them and I’ve said, oh my goodness, I’m going to ask someone on our team that enjoys doing all this research to help us out with it.

Jason:
There you go, there you go. Okay, US citizens buying aboard.

Chris:
Sure, but before I hit that. I did think of one more pitfall and I’m sorry to back track to the foreign owners buying property here. If they sell the property, this is very important, if they sell a property, they’re going to be subjected to FIRPTA, which is a withholding on the sale of the property that they can get back when they file their tax return, but there is a tax withholding when they sell the property and typically you’ll get most of that, but I just wanted to touch on that real quick, because I don’t want to omit something that important. As far as US residents purchasing property else where, well, as US residents we are taxed on our house or our worldwide income.

Jason:
Yeah, we have the privilege of being the only country on earth, in my understanding, or the overreaching, invasive US government and their friendly agency known as the IRS taxes people on all worldwide income. So, if you’re an Australian and you move to Germany, for example, Australia doesn’t say, hey, pay us the money you earned in Germany. You know, pay us taxes on the money you earned in Germany. They just say, oh, well, you’re living overseas. Maybe you’re not enjoying the benefits of our country, so you know, you don’t have to pay, but the US is different in that way.

Chris:
Correct. The US is different. So, you pay tax on worldwide income. So, let’s just run through an example. If you purchase a villa..my next door neighbor, true story here in Michigan, is an Italian builder, so we get along really well. He’s got a nice pizza oven in his backyard. Him and his wife bought a villa in Italy, which is good for them. Now, that is part of the US gross estate for estate tax purposes and if no body, if they don’t rent it out or anything other than it being part of their gross estate, there’s really no affect on their tax lives for owning that villa. If they, let’s say they setup a bank account in Italy because they travel there often and they wanna have some access to money and they don’t want to play the currency exchange rate game.

Well, now it’s a different story. Now, you have to deal with something called FBAR, which stands for Report of Foreign Bank and Financial Accounts and that gets attached to your individual tax return, so if you are a US person and have a financial interest or signature authority, even if you’re the signature authority of at least one financial account located outside the United States and the value of all the financial accounts exceeds $10,000 at any time, you have to file an FBAR form on your US tax return. Again, if they start an account in Italy and it has more than $10,000 at any time or even signator on an account there, they have to file the FBAR.

Let’s say they have that villa and they have it for a couple of years and then they realize, you know what? This is really nice, let’s start renting it out. Now, you have a rental property. So, again, I don’t know the rules in Italy as far as what their reporting requirements would be there, but in the United States we would have to report the activity from the rental property. The gross rent minus deductions. Now, the good thing is as a US resident owning that property in Italy and if you’re renting it out, you do get a tax credit for any foreign tax in Italy. So, you’re not getting double taxed on it, but you’re going to have to file a return in Italy, pay an Italian tax, then you file it here, but you get a credit for the Italian tax that you did pay. So, again, that would be an example of someone investing in real estate aboard.

We have some clients that move out of the country to work. It happens all the time. We just say that somebody moved to military contractors, we had a couple move to Australia to do some teaching and that sort of stuff and they wanted to have their children experience that culture. So, if you’re a US resident and you move to Australia for work, you pay tax on your worldwide, so you pay tax on your Australian income, but there is something called the foreign income exclusion.

So, if you’re working aboard, you can exclude almost $100,000 of your income and not have to pay US income tax on that. So, there are some tax benefits. You’ll see a lot of professors take fellowships and jobs over into the UK or Europe, because it’s going to save them a lot of money on their taxes and helps them out a lot. Those are some of the considerations that we have to think about.

Jason:
Okay good, well Chris, give out your website, tell people where they can learn more about you.

Chris:
Sure, my website is http://www.integratedcpa.com/ or for our non-resident tax practice, it’s http://nta.integratedfg.com/. On Twitter it’s @PiccCPA. Follow me, I send out a bunch of information. I just started following the Jet Setter show this morning and just tweeted something out on the FBAR. Always trying to put good content out there and feel free to contact me. Send me an email or give us a call and I’m more than happy to help out.

Jason:
Okay, thank you. That’s great, Chris. One final question before you go. I was thinking about the issue of how Americans have to report all worldwide income. I have never found after traveled to 71 countries and some of them multiple times looking the real estate all around the world, I’ve just never found anything that quite matches the US housing market. I think it’s a far superior place to invest and, believe me, I would be recommended foreign real estate. I went on a tour last summer, did a bunch of European countries again and I was thinking, oh, Spain is going to be the great thing, you know, their economy is in the dumps and you can see why it’s in the dumps, because the people don’t want to work! They had socialism for so long, it looks like Spain is the next Greece. Portugal, Spain, Italy, Greece, Ireland, you know, they all have problems.

Looking there, it made me think with what you said, say you did buy a foreign rental property and so you have income and you have to report the income. Is it different if you hold that property inside of an entity? They commonly call these entities international business corporations or IBCs. If you have it inside the entity and you don’t take a distribution from the entity and the entity is, you know, in some foreign country, but you’re not actually taking income out of it, is it income? Does the IRS say, hey, report that, that’s income even if you didn’t take income from it, you just left it in the entity and let the entity’s bank account accumulate that money.

Chris:
That is a great question and if you did not take a distribution or dividend from that, then you will not have any income. Just like if you could invest in stock of a Chinese auto manufacturer based in China, but if they paid you a dividend, yes, you’d have to pay taxes on that dividend, but you don’t have to pay tax on the fact that you own that stock. The only thing you might have is you might have to file an FBAR, which again, the FBAR form, there’s no tax on the FBAR. It is simply a information only return that you’d be required to file, because you have, you know, you have a corporation that owns a bank account that has over $10,000 in it. You might have to file an FBAR, but as far as filing any type of tax for that income, no, you would not have to do that.

Jason:
Yeah, okay. Good, good. Well, Chris. Thank you. This has been very enlightening and we appreciate having you on the show.

Chris:
Well thank you very much Jason, have a great afternoon and it was my pleasure being on the show. I appreciate it.

Announcer:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.