Asset Protection – LLCs and Real Estate

“FIRPTA Withholding” (Tax Withholding U.S. Real Estate)

The sale (or other disposition) of U.S. real property interest by a foreign person (transferor) is subject to a tax withholding of 10% of the amount realized in the disposition (35% of gain recognized by foreign corporation on distribution to its shareholders), under FIRPTA (Foreign Investment in Real Property Tax Act of 1980).

In most cases, the transferee (buyer) is the withholding agent for the “disposition of U.S. real estate” (i.e. sale or exchange, liquidation, redemption, gift or transfer).

A U.S. real property interest is any interest, other than solely as a creditor, in real property (including an interest in a mine, well or other natural deposit) located in the U.S. (or the U.S. Virgin Islands), as well as certain personal property that is associated with the use of the real property (e.g. hotel, furniture, farming machinery).

The transferee must deduct and withhold a tax equal to 10% of the total amount realized by the foreign person on the disposition.

The amount realized is the sum of:

1. The cash paid or to be paid (principal only);

2. The fair market value of the other property transferred, or to be transferred, once

3. The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer.

The amount realized is the amount paid for the property. If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors listed on the capital contribution of each transferor.

Regarding real property interests held by corporations:

1. A foreign corporation that distributes a U.S. real property interest must withhold all tax equal to 35% of the gain it recognizes on the distribution to its shareholders;

2. A domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a foreign shareholder if:

a. The shareholder’s interest in the corporation is a U.S. real property interest;

b. The property is distributed either in a stock redemption or asset liquidation.

To avert the “FIRPTA tax withholding” on the sale, the investor may establish a U.S. based LLC, which issues a Form W-9 to the buyer so there is no tax withholding on the sale. Subsequently, the LLC will withhold an LLC member’s distributions to the foreign person member (verified by the K-1 issued by the LLC).

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