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Legal Issues When Non-US Investors Buy US Real Estate

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by Richard Keyt, LLC & Real Estate Law Attorney

I am an attorney licensed to practice law in the U.S. State of Arizona since 1979.  I have formed 3,700+ companies of all  types, the majority of which were formed to own investment real estate.  I assist nonresident aliens in forming a company to own the U.S. real estate and satisfy all of the “red tape” associated with owning a U.S. company such as opening U.S. bank  accounts, getting IRS identification numbers, setting up bookkeeping for the company and preparing and filing U.S. income tax returns for the company and its owners.

For several years I have been forming Arizona limited liability companies owned by non-U.S. investors from all over the world who purchase U.S. investment real estate.  When I first got involved with foreign investment in U.S. real estate I found it very difficult to understand and acquire the knowledge non-U.S. investors need to buy U.S. real estate and I am a real estate law and tax law lawyer.  I have a masters degree in U.S. income tax law from New York University School of Law and it took me a  long time to understand the tax issues non-U.S. investors must deal with such as what are IRS Forms W-7 (the application for an ITIN), W-8BEN and W-8ECI.  Investing in the U.S. for non-U.S. citizens is truly a quagmire of red tape, which is why savvy non-U.S. investors hire me to take care of the red tape for them so they can concentrate on finding good U.S. investment property.

The Purpose of This Article

The primary purpose of this article and the other articles linked to below is to help Australian investors and other non-U.S. investors cut through the U.S. red tape so they can concentrate on the more important task of finding and buying U.S. investment property and making money from it.  The first step for non-U.S. investors who want to invest in U.S. real estate is to hire me to form their limited liability company, get the LLC a federal employer identification number and assist in opening a bank account in the name of the LLC and another bank account in the investor’s name.

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

If you are a foreign citizen who is considering investing in United States real property you must study the comprehensive U.S. law checklist I created that lists and explains the legal issues that affect all non-U.S. investors who invest in U.S. real estate.  I explain what tasks need to be accomplished, the deadline for accomplishing the tasks and what I do when a non-U.S. investor hires me to form a U.S. limited liability company for the investor’s United States property.

How Long Does It Take?

We typically complete the following services within the specified time periods:

  • Form the LLC:  Less than one week after we are hired.  See item 1 below.
  • Obtain federal  employer identification number:  Within one day of receiving a signed IRS Form SS-4 from the investor.  Scroll down on the linked to SS-4 form to see my helpful comments, the IRS instructions and important high-lighted text.   The signed IRS Form SS-4 authorizes my legal  assistant to contact the IRS and get the EIN for the LLC.  My legal assistant must call the IRS and fax the SS-4 form to the IRS, a process that typically takes 45 minutes or more.  The LLC must have an EIN to open a U.S. bank account in its name.  See item 2 below.

When Can My LLC Buy U.S. Real Estate?

The day I file the Articles of Organization with the formation state the LLC is born and it can enter into a contract to purchase U.S. real estate.  As soon as the LLC opens its bank account funds can be wired from the investor’s bank to the LLC’s US bank account and the US bank can then then wire the funds needed to purchase U.S. real estate.

Non-U.S. Real Estate Investor Services

Non-U.S. investors hire me to assist in accomplishing the following important tasks in the order listed:

1.  Form a limited liability company in the United States owned by the investor(s) that will be the owner of the U.S. real estate.  The primary reason U.S. real estate investors form an LLC to own the investment real estate is to protect the investors from  liabilities that might arise from the real estate such as people being injured on the property.  To learn more about  LLCs spend some time on my content rich website called  “Arizona Limited Liability Company Law.

How to Hire LLC Attorney Richard Keyt to form and LLC in:

Important Note:  An LLC formed in any state in the United States can own real estate in any or all of the other 49 states.

2.  Obtain a federal  employer indemnification number (EIN) for the LLC.  The EIN is needed to open a U.S. bank account in the name of the LLC.  All income generated from the U.S.  investment must be paid into the LLC’s U.S. bank account.  Before we can get the EIN the investor must complete, sign and return to me an IRS Form SS-4.  Scroll down on the linked to SS-4 form to see my helpful comments, the IRS instructions and important high-lighted text.  Email or fax the completed & signed form to: rickkeyt@keytlaw.com or 602-297-6890.

3.  Open a business bank account for the LLC.  See Requirements for a Non-US Person to Open a US Bank Account.

4. Obtain IRS Form W-8ECI.  The LLC must give this Internal Revenue Service form to its property manager, the U.S.bank where the LLC deposits its U.S. source income and third parties that have money payable to the LLC because if the payor does  not have a W-8ECI the payor must withhold 30% of the funds and pay it to the IRS.  The LLC also has the option to give third parties an IRS Form W-8BEN in lieu of a W-8ECI.  Consult with your tax adviser 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.  The choice between these two methods of U.S. income tax can have significant nonresident alien tax consequences.

5.  Obtain an Individual Taxpayer Identification Number (ITIN) for the investor.  ITINs are used for tax purposes only, and are not intended to serve any other purpose. The Internal Revenue Service issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers.  The ITIN is only available to individuals who are required to have a taxpayer identification number for tax purposes but who do not have, and are not eligible to obtain a SSN from the Social Security Administration (SSA).  Only individuals who have a valid filing requirement or are filing a U.S. Federal income tax return to claim a refund of over-withheld tax are eligible to receive an ITIN. Generally a U.S. Federal income tax return must accompany the ITIN application, unless the individual meets one of the “exceptions.”  There is an exception we use to apply for the  ITIN immediately, but even then it takes several months to obtain the ITIN from the IRS.

6.  Prepare and File a U.S. Bureau of Economics 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.  This form is due not later than May 31 of the year following year the foreign parent acquired the interest in the U.S. affiliate.  We prepare this form when we form an LLC then file it in January of the year after the year the investor acquired the U.S. investment.  Learn more at “Bureau of Economic Analysis Annual Reporting Requirement.”

7.  Assist in setting up Quickbooks software for the company to use for bookkeeping.  This is the best way to maintain books for the LLC and it also allows you to export a tax preparers file that you give to your U.S. tax return preparer.  If you have properly input all financial information into Quickbooks, you email  the file to your tax preparer because it contains all the information the tax preparer needs to prepare the LLC’s and/or owner(s) U.S. tax returns.

8.  Prepare U.S. income tax returns for the company and its owner(s).  We recommend all nonresident alien investors hire A+ Tax Service, LLC, to prepare the U.S. federal and state income tax returns and provide bookkeeping services for their U.S. LLC and its owners.  This company has prepared thousands of tax returns for U.S. citizens and U.S. companies and hundreds of tax returns for non-U.S. citizens, non-U.S. residents and their companies.  In general non-U.S. citizens, non-U.S. residents must prepare and file an IRS Form 1040NR on or before June 15th of the year after the year in which the taxpayer formed the LLC or purchased U.S. rental income property.  If your U.S. LLC has only one owner it is treated as a disregarded entity by the IRS and does not need to file an LLC tax return.  However, if your U.S. LLC has two or more owners it will be taxed as a partnership and the LLC must file a separate tax return.  Each owner will be given an IRS Form K-1 each year that is used by the owner to prepare the owner’s U.S. income tax return.  Non-U.S. investors who are married and who both own an interest in the LLC must each prepare and file an IRS Form 1040NR.  Definition of Nonresident Alien:  For U.S. tax purposes, an alien is an individual who is not a U.S. citizen.  Aliens are classified as resident aliens and nonresident aliens.  Resident aliens are taxed on their worldwide income, the same as U.S. citizens.  Nonresident aliens are taxed only on their U.S. source income and certain foreign source income that is effectively connected with a U.S. trade or business.  Nonresident aliens must file the appropriate nonresident alien tax return, i.e., an IRS Form 1040NR for a person and an IRS Form 1120-F for a corporation.

How to Hire A+ Tax Service, LLC for Bookkeeping or Tax Return Preparation Services

Learn more about U.S.  taxation of LLCs and their non-U.S. owners and the services provided by A+ Tax Service, LLC, and its fees for services read “Bookkeeping & Tax Return Preparation Services.”

How to Hire LLC Attorney Richard Keyt to form and LLC in:

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