Last week I posed the question of which corporate structure you should create to hold foreign property. I started by suggesting you might not need any structure, depending on your specific circumstances. We also discussed basic foreign corporations that could work well in certain cases.
If you missed that essay, you can read it here.
Today I will review several other structures and explain why they might be the most advantageous choice for your needs.
The limited liability company (LLC) is one of the simplest, easiest, and cheapest legal structures to create to hold foreign real estate. It can be structured as either a local or international (offshore) LLC. The tax aspects of an LLC do not stay at the corporate level but rather “pass through” to the individual owner or owners, referred to as the “members” (rather than as the shareholders as in the case of most other companies). This type of pass-through vehicle eliminates double taxation, assuring that tax is only payable once on things like rental income or capital gains’ tax.
An LLC is frequently used as a vehicle for IRA investment into real estate. The property is legally vested in a company for asset-protection purposes while at the same time the income flows back to the IRA custodian and into the IRA account on a tax-deferred basis. The member interests can be owned by the IRA to maximize tax deferral and efficiency of rental property income, as well as capital gains. The member interests themselves can also be distributed back fractionally to the IRA account owner as needed for part of any mandated distribution.
So if investing in foreign real estate is something you want to do with your retirement funds, the IRA/LLC structure is by far the best way to do it.
LLC/Corporate Two-Tiered Structure
In some instances the best choice is a two-tiered structure combining the positive elements of the corporate structure and the LLC. An LLC owning an IBC which uses leverage (debt) in acquiring property inside an IRA is one such scenario. This is referred to as an “UBIT blocker” because it keeps “unrelated business income taxation” from being assessed against the IRA.
In other situations the top level company or “holding company,” as well as trusts and foundations, can transfer property by selling off the lower level company in which the property is actually registered. This type of structure can minimize or avoid future property transfer taxes and convert higher levels of taxation on real estate, as assessed in some countries, into lower levels of capital gains tax associated with the sale of corporate stock, shares, or member interests.
This type of structure is frequently used by foreign, non-resident taxpayers who own U.S. property. If Venezuelan owners of a Miami condo have a two-tiered corporate structure with the holding company offshore (to both the United States and Venezuela) and the subsidiary Florida company in turn owns Florida real estate, then the Venezuelan seller can simply sell his offshore company to another Venezuelan buyer without transferring the shares in the Florida company or the Florida real estate.
The transaction takes place quickly, discreetly, and without any property transfer taxes being paid. The same type of two-tiered structure is used in similar transactions all around the world.
Civil Law Private Interest Foundations, Common Law Asset Protection, And Estate Planning Trusts
These types of foundation or trust structures are used with more expensive properties that are intended to remain within a family for multiple generations. The separate legal, juridical structure is for the most part impervious to law suits, creditors, and gift, death, and estate taxes.
It’s ideal for providing a secure home for a spouse, child, grandchildren, friend, or other heir without actually giving the property to them outright. This type of structure creates what are sometimes referred to as “life estates,” which are separate and distinct from fee simple title ownership.
The cost of maintaining the property including upkeep, taxes, mortgages, etc., is paid for by the foundation or trust structure allowing the beneficiaries to simply enjoy the property without the headaches of property ownership. But, at the same time someone such as a trust beneficiary with a life estate cannot decide to sell the property. Only the trustee can sell the property as permitted by the deed of trust.
If the trust instrument is written in such a way that the trustee must maintain the property for future generations, then essentially nobody can sell the property. This type of trust are referred to as a dynasty trust exactly because it creates a legal structure designed to go on for multiple generations, centered around a family home. Frequently, dynasty trusts function alongside family offices to hold property as well as businesses for many, many generations.
In other cases the trust might be designed to maintain a home for an elderly parent, a handicapped child, a spouse unable to control spending, etc. When this is done for a specific person or reason (rather than for a span of time of many generations as in the case of a dynasty trust), the trust is referred to as a “special needs” trust. Once the “need” has been fulfilled, then the trustee is authorized to sell the property and distribute the proceeds to other beneficiaries at some point in the future.
Which Option Is Best For You?
There are dozens of legal and corporate structures you can create to own overseas property. Before deciding which structure is right for you, ask yourself these questions:
- What is my goal and objective in buying the property?
- Am I buying the property to serve as my foreign residency?
- Am I trying to buy a property and flip it in six months, or is it something I want my grandchildren to have 60 years from now?
- Will it generate income that I would prefer go into a tax-sheltered vehicle like a self-directed IRA or a life insurance wrapper?
- Am I buying the property myself or with partners, and if I have partners, how do our tax liabilities differ?
Once these questions have been settled in your mind, then you can begin to contemplate the right type of legal structure you want, if any. When you understand your goals and objectives, we can decide which type of corporate and legal structure is necessary to achieve those goals and objectives.
Finally, once we know what type of legal and corporate structure you need, then we can look for the right jurisdiction, frequently called jurisdiction shopping, in which to establish the desired legal or corporate structure. Consider which jurisdictions will deliver the maximum tax efficiency, asset protection, estate planning, economies of scale, and more.
No One Size Fits All
Certainly legal and corporate structures are not for everyone or even for every situation. The same buyer looking to buy and flip a vacant beach lot in Costa Rica won’t use the same type of corporate structure when buying a French château they hope to own for many generations.
Corporate and legal structures can change in every situation based on the jurisdictions involved, the tax situation, and the goals and objectives of the buyer. The objective of any legal or real estate advisor should be to help you, the buyer, create structures that best help them meet your goals and objectives for owning foreign real estate.
Structures are like Goldilocks and the three bears… you don’t want too many or too few… structures should be “just right” for you situation and for you needs.
Joel M. Nagel