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U.S. Law Checklist for Foreign Investors Buying U.S. Real Estate

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by Richard Keyt, LLC & Real Estate Law Attorney

I have formed 3,700+ limited liability companies since I started counting in 2002.  The great majority of these LLCs were formed to own U.S. real estate.  I have been forming companies for non-U.S. investors to buy U.S. real estate for at least four years during which time I have learned what non-U.S. investors need to do to satisfy United States legal requirements arising from investing in the U.S.

If you are a non-U.S. person considering investing in U.S. real property and you have done any home work on the U.S. legal issues arising from investing in U.S. real estate you know that it is extremely difficult to identify the issues and even more difficult to solve them.  However, if you are reading this article then you will now have identified the legal issues.  If you want to solve the legal issues quickly and get piece of mind at a reasonable cost, you need to hire me to form your United States limited liability company and take care of the other legal tasks listed below.

My checklist identifies and explains each of the primary legal  issues applicable to non-U.S. investors who want to buy U.S. investment real estate.  See my content rich website called “Arizona Limited Liability Company Law” for additional reasons why people hire me to form their LLC.  For a list of the services I provide when I form an LLC for a non-U.S. investor read “Arizona LLC Formation Services.”

The following checklist is one I use and give to the non-U.S. investors who hire me to form their U.S. limited liability company that will own U.S. investment real estate.  If you are a non-U.S. investor who will invest in U.S. real estate you must accomplish each of the tasks listed below.  Deadlines other than government form filing deadlines are estimates, not guides.  Keep in mind it is always better to complete a task sooner rather than later in case any complications arise that cause a delay.

To learn more about non-U.S. investors investing in the United States, see my article called “Legal Issues When Non-US Investors Buy US Real Estate.”

LLC Attorney Richard Keyt’s Checklist for Foreign Investors Buying U.S. Real Estate
June 24, 2012

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30+ days before purchasing U.S. real estate.Learn about legal issues arising from investing in U.S. real estate.Investor Overview of Investing in U.S. Real Estate
30+ days before purchasing U.S. real estate.Form Limited Liability Company to Purchase U.S. Real Estate

Hire LLC & real estate attorney Richard Keyt to form a limited liability company to be the buyer on the purchase contract and the owner of the investment real estate.

Richard Keyt
30+ days before purchasing U.S. real estate.Get EIN

Obtain a federal employer identification number (EIN) for the LLC from the Internal Revenue Service.

Richard Keyt Overview of Investing in U.S. Real Estate. See the discussion about the EIN on this page.
30+ days before purchasing U.S. real estate.Prepare Purchase Contract with LLC as the Buyer

The primary reason you form an LLC is to limit your liability for things associated with the investment that go bad. You want the LLC to be the purchaser on the purchase contract because you want it (not you) to be the defendant if a breach of contract lawsuit were to arise.

Investor and Investor's real estate attorney.Both myself and another attorney in my law firm are Arizona real estate attorneys who can prepare and review real estate purchase, sale and lease contracts and related documents, but only with respect to real estate located in Arizona. If your property is in another state, contact me and I will refer you to a real estate attorney in the appropriate state.
20+ days before purchasing U.S. real estate.Get U.S. Bank Account for the LLC

Open a business bank account in the name of the LLC with a U.S. bank.

See Requirements for a Non-US Person to Open a US Bank Account.

10+ days before purchasing U.S. real estate.Sign All LLC Documents

Sign the LLC's Operating Agreement and related formation documents. If your LLC is purchasing property through an escrow company or obtaining title insurance, the escrow company and the title insurance company will want a copy of the signed Operating Agreement.

All owner(s) of the LLC.We send the Operating Agreement and the other organizational documents to the contact person for the LLC as Adobe pdf attachments to email messages.
4+ business days before purchasing U.S. real estate.Wire Purchase Funds to the LLC's U.S. Bank Account

Investors wire to the LLC's U.S. bank account the funds needed to purchase the property.

Investor
2+ business days before purchasing U.S. real estate.Wire Funds from LLC's Bank Account to Escrow Agent's Bank Account

Investors wire to the appropriate U.S. bank and the appropriate account the funds needed to close the real estate contract and purchase the property.

InvestorGet wire instructions from the escrow agent or the property person and give the wire instructions to your US bank so it can arrange to to wire the funds in time to make the purchase.
Concurrently with the purchase of the real estate.Purchase Title Insurance on the Real Estate

As an Arizona real estate attorney I recommend that anybody who purchases real estate should get title insurance on the property concurrently with the purchase. The purpose of title insurance is to insure the property owner's title to the property and pay to cure any title defect that is not excluded from the policy's coverage.

Investor and title insurance company.Before you sign a contract to buy U.S. real estate you must understand what title insurance is, why it is so important, what a preliminary report is and how it provides protection for the property owner.  Please read the following articles and bookmark them for future reference:

Given the importance of title insurance I suggest you hire a real estate attorney in the state where the real property is located to review the preliminary title insurance commitment given by the title insurance company before the contingency review period in your purchase agreement expires. Contact me if you need a referral.

As soon as possible after purchasing the U.S. real estate.LLC Signs Property Management Agreement with the Property Manager

This is the agreement that states what the property manager will do and how much the property manager will charge.

This agreement must be signed by the LLC, not the investor. If the investor signs the property management contract, the investor can be sued for breach of the contract. Note: The primary reason to form the LLC is so the investor is shielded from liabilities that arise from the real estate. If, however, the investor rather than the LLC signs the contract the investor can be sued.

Investor and the LLC's property manager.Of course I am biased, but you may want to have a contracts attorney in the state where the property is located review the contract before the LLC signs it. Contact me if you need a referral.
As soon as possible after purchasing the U.S. real estate.Purchase Liability & Property Damage Insurance

The LLC must have insurance to cover damage to the property and any liability that might arise from people on the property. Purchase as much coverage as you can afford, including an umbrella policy. Ask your insurance agent for advice on types of insurance and coverage amounts.

Investor and insurance agent licensed in the state where the LLC's real estate is located.Umbrella insurance is relatively inexpensive for coverage amounts up to $5 million. See "Arizona Jury Gives Volunteer Worker Injured in a Fall from a Ladder $5.9 Million"and "Arizona Damage Awards in Premises Liability Cases."
As soon as possible after purchasing the U.S. real estate.Obtain an ITIN Request Letter from LLC's Bank or Property Manager

To get an Individual Tax Payer Identification Number (ITIN) before the due date of the investor's first U.S. tax return the investor must get a signed letter on official letterhead from the U.S. bank or the LLC's property management company verifying that an ITIN is required to make distributions that are subject to IRS information reporting or federal tax withholding. With this letter the investor can claim exception 1(b) [if the letter is from the bank] or 1(d) [if the letter is from the property manager] as the reason for getting the ITIN early.

Investor & Investor's U.S. Bank or the LLC's property mangerFrequently, third parties (such as banks and other financial institutions) that are subject to information reporting and withholding requirements will request an ITIN from you to enable them to file information returns required by law. If you are requesting an ITIN for this reason, you may be able to claim one of the exceptions described later. Enter on the dotted line next to box h the exception that applies to you. Identify the exception by its number, alpha subsection (if applicable), and category under which you are applying (for example, enter “Exception 1a-Partnership Interest” or “Exception 3-Mortgage Interest”). Examples of completed Forms W-7 can be found in IRS  Publication 1915. You will not need to attach a tax return to your Form W-7.

Exception 1. Passive income—third party withholding or tax treaty benefits. This exception may apply if you are the recipient of partnership income, interest income, annuity income, rental income, or other passive income that is subject to third party withholding or covered by tax treaty benefits. See W-7 line 1(b) & 1(d) exception requirements. for more details on Exception 1.

I send the contents of the letter to my LLC client who gives the text to the bank or property manager to put on letterhead and sign.

As soon as possible after purchasing the U.S. real estate.Get ITIN

Prepare and sign an IRS Form W-7, Application for an Individual Tax Payer Identification Number (ITIN). Currently the IRS will only issue ITINs when W-7 applications include original documentation, such as passports and birth certificates. ITINs will not be issued based on applications supported by notarized copies of documents.

InvestorRead How to Obtain an ITIN from Outside the United States. See the IRS Form W-7 and the Instructions for the W-7.
As soon as possible after purchasing the U.S. real estate.Give W-8BEN or W-8ECI to Property Manager & U.S. Bank

Consult with your tax advisor to determine if you want the LLC's rental income to be "effectively connected" ("ECI") to a U.S. trade or business or "not effectively connected" ("NECI"). If the income is ECI then it means: (1) the gross income can be reduced by typical deductions arising from a rental business, and (2) third parties such as your property manager and a bank are not required to withhold any money payable to the LLC. If the income is NECI then it means: (1) the gross income is not reduced by any deductions and is taxed at the rate of 30% unless a tax treaty provides otherwise.

If you decide to have the income ECI then you sign an IRS Form W-8ECI. If you decide to have the income be NECI then you sign an IRS Form W-8BEN. After signing the appropriate IRS Form you give it to the affected third parties such as the property manager and the LLC's bank. If a third party does not get a W-8ECI then the third party must withhold 30% of all funds it has that are payable to the LLC and pay it to the IRS.

Do not send either of these forms to the IRS.

InvestorIRS Form W-8ECI , Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, and Instructions for the W8-ECI Form.

IRS Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, and Instructions for the W-8Ben Form.

Before a tenant signs a lease.LLC Signs the Lease with the Tenant

The lease must be signed by the LLC, not the investor. If the investor signs the lease, the investor can be sued for breach of the lease contract and any other claims that arise from the tenant's use of the property. Note: The primary reason to form the LLC is so the investor is shielded from liabilities that arise from the real estate. If, however, the investor rather than the LLC signs the contract the investor can be sued.

InvestorFor more on how to sign and not sign contracts for an LLC see my article called "Court Finds LLC Member Liable for LLC’s Debt because Member Did Not Sign Contract Correctly
May 31 of the year following year the non-U.S. investor formed the LLC.File BE Form 15

Prepare and sign a Bureau of Economic Analysis Form BE-15. All U.S. business enterprises in which a foreign person owns 10% or more of the voting interest are subject to annual BEA reporting requirements unless an exemption applies. This includes foreign ownership of real estate, improved and unimproved, except residential real estate held exclusively for personal use and not for profit making purposes. If your U.S. investments are under $40,000,000 we prepare the BE-15 form for your signature then file it with the Bureau of Economics.

InvestorBureau of Economic Analysis Form BE-15 Claim for Exemption. Learn more at “Bureau of Economic Analysis Annual Reporting Requirement.”
June 15th of the year after the LLC is formed and every June 15th thereafter.File U.S. Income Tax Return

Each owner of the LLC must prepare and file IRS Form 1040NR, U.S. Nonresident Alien Income Tax Return. Note: If you and your spouse are owners of the LLC and non-resident U.S. aliens you cannot file a joint tax return. Each spouse must prepare and file his or her own Form 1040NR. June 15th is the due date of the return only if the investor did not receive wages subject to U.S. withholding from a U.S. employer.

You must provide your ITIN on this tax return. If you claim your spouse as an exemption you must also put your spouse's ITIN on the return.

Investor and US accountant who prepares tax returns for non-US investors"IRS Form 1040NR, U.S. Nonresident Alien Income Tax Return, and Instructions for IRS Form 1040NR.

Click here to Hire LLC Attorney Richard Keyt to form an Arizona LLC.

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