Property Ownership Structures and How They Affect Your US Expat Taxes
IJ Zemelman Aug-01-2015
If you are considering investing in US property, you may be interested in establishing a business structure to increase your privacy and protection against losses.
US property values have – once again – taken a dive, and many US Expats are capitalizing on the market value downturn. If you are a US Expat interested in US property investments, you are encouraged to consider establishing a separate business entity to protect yourself from additional liability. We will examine different types of structures and take a look at how your US expat taxes are affected by each.
A Limited Liability Corporation (LLC) is the most attractive business entity for the ownership of US residential property. An LLC is the easiest entity to establish and offers a substantial amount of protection to the individual property owner.
The LLC is the easiest business entity to establish and maintain. If you are the sole LLC owner, your LLC will be treated as a ‘disregarded entity’. -As such, all of the business activity of your LLC will be reported on your individual US expat tax return. This is preferable to many US Expats, because there are no additional taxes or reporting obligations.
If your LLC has multiple owners, it will be regarded as a partnership which will send out a Schedule K-1 to each listed owner. In this case, you will be required to file Form 1065, US Return of Partnership Income. Form 1065 will be required each taxable year.
C Corporations provide more liability protection than an LLC because they are regarded as a completely separate entity. They may not be the best option for US residential property owners, however, because they are subject to a corporate tax rate of at least 15% plus additional shareholder taxation.
C Corporations are regarded by the IRS as a business establishment completely separate from its owners and shareholders. As such, there is maximum liability protection. C Corporations are preferable to some US Expats, because they allow investors the opportunity to manipulate the amount of distributed dividends and the time at which they’re delivered, thus offering investors the most control over their taxable income.
The primary disadvantage to the C Corporation is that they are generally subject to double taxation. Profits earned within a C Corp are subject to a rate of taxation of 15% to 35% and are subject to even more taxation once they are distributed to shareholders.
An S Corporation is the least viable option for investing in US real estate. There are a variety of challenges when it comes to deducting losses and acquiring mortgages.
The S Corporation is not typically recommended for ownership of US residential property investments. One positive aspect of the S Corporation is that the loss and income will flow through the individual shareholder. The negative side of this is that the shareholder can only deduct losses at a rate consistent with his/her involvement with the S Corporation. It is also difficult for S Corporations to acquire a mortgage.
Some US Expats are opening up foreign business entities in their host country in order to more easily meet the local tax requirements.
US Expats living abroad may be interested in opening up a foreign entity through which US residential property will be acquired and maintained. Establishing a foreign entity makes it easier to satisfy foreign tax obligations in your host country, but it may result in a higher rate of taxation being assessed by the United States. Furthermore, you could become subject to double taxation. If you are considering establishing a foreign entity through which you will invest in US residential real estate, make sure to speak with an experienced US expat tax professional to help you plan effectively.
The simplest method of investing in US residential real estate is through individual ownership. In regard to filing your US expat tax return, profits and loss will be reported on Form 1040.
When it comes to filing your US expat tax return, the simplest option with US residential property investments is to purchase your investment real estate as an individual. This will allow you to claim profit and loss on your annual IRS Form 1040. The problem with choosing this avenue of investment is that you don’t have any protection of liability; so if there are legal issues associated with your property, your personal assets would be at stake.
I.J. Zemelman, EA is the founder of Taxes for Expats