1. FOREIGN INVESTMENT IN
U.S. REAL ESTATE
Presented to
State Bar of California | Tax Section
April 2, 2012
ROGER ROYSE, ESQ. DAVID SPENCE, ESQ.
rroyse@rroyselaw.com dspence@rroyselaw.com
ROYSE LAW FIRM, PC
PALO ALTO | SAN FRANCISCO | LOS ANGELES
www.rroyselaw.com www.royseuniversity.com
TELEPHONE: 650.813.9700 | SKYPE: roger.royse
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this
communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1)
avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2. OUTLINE
1. Income Tax Summary - ECI
2. Withholding Taxes – FDAP and FIRPTA
3. Estate and Gift Taxes
4. Structuring foreign investment in U.S. real estate
5. Joint ventures with offshore investors
6. Financing vehicles (debt vs. equity)
7. Other Concerns
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3. INCOME TAX SUMMARY - ECI
Effectively Connected Income (ECI)
• Income effectively connected with a U.S.
trade or business
– Asset use or business activities test
• Rates
– 10% to 35% Individual; capital gains
– 15% to 35% corporate ECI or PE
• Net lease property vs. active management
• Partner in tax partnership
• FIRPTA Gains as ECI
• Treaties and “permanent establishment”
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4. NON–ECI OR FDAP
Fixed, determinable, annual or periodical (FDAP) income
• Activity not rising to level of trade or business
• Includes rents, interest, dividends, etc
• 30% withholding rate, may be reduced by treaty
• Section 871(d)/882 election to pay tax on net basis
– Exclusions (interest, personal property, non business)
• Branch Profits
• Portfolio interest
• Partnership withholding
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5. FIRPTA (SECTION 897)
Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
• 10% gross withholding on dispositions of a U.S. Real Property Interest or
U.S. Real Property Holding Corporation (USRPHC)
• USRPHC
– 5 Years
– 50% or more value of assets are U.S. real estate
– Optional book value method (25% test)
– < 50% subs
– > 50% subs (look through rule)
– Foreign corporations not USRPHC
• Interest Solely as a creditor - Equity kickers
• Disposition is deemed to be ECI
• Exemptions from withholding
– Affidavit of non foreign status
– Stock is not a USRPHC
– Non recognition transactions
• Cal-FIRPTA
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6. ESTATE AND GIFT TAX ISSUES
A RIDDLE:
When is a Resident not a Resident?
Treas. Reg. § 20.0-1(b)(1)
provides a subjective definition of “resident” for
estate tax purposes:
“A „resident‟ decedent is a decedent who, at the time of his death, had his
domicile in the United States…A person acquires a domicile in a place by
living there, for even a brief period of time, with no definite present intention
of later removing therefrom. Residence without the requisite intention to
remain indefinitely will not suffice to constitute domicile, nor will intention to
change domicile effect such a change unless accompanied by actual removal.”
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7. ESTATE AND GIFT TAX ISSUES
“Residence” for Estate & Gift Tax Purposes means:
“DOMICILE”
• It is not the same as Residence under Income Tax Rules.
• It is a “facts and circumstances” test.
• Does Not Require Exclusivity
• May be affected by treaty provisions
• Consider: Estate of Jack v. U.S. 54 Fed. Cl. 590 (2002):
• At the time of death, Decedent was legally present in the U.S. on a
Temporary Work Visa.
• IRS claimed he was a US domiciliary, and imposed estate tax on his
worldwide assets.
• Taxpayer argued that the IRS’ position imputed upon the decedent an
intent to break federal immigration law.
• Court denied taxpayer’s summary judgment motion, holding that if the
decedent was shown to have developed an intent to remain in the US
indefinitely, he could be a US Domiciliary despite his temporary Visa.
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8. ESTATE AND GIFT TAX RATES
NON-U.S. DOMICILED NON-CITIZENS
Applicable to U.S. Situs Property
But, what about gifts or bequests to a
non-citizen spouse?
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9. QUALIFIED DOMESTIC TRUST (QDOT)
 The Good: Allows testamentary bequests to non-citizen spouse to qualify
for the unlimited estate tax marital deduction.
 Requires all income to be paid annually to spouse for life.
 No person has power to distribute to anyone other than surviving spouse.
 The Bad: Must have a U.S. person as trustee. If QDOT assets exceed $2
million FMV then trustee/co-trustee must be a domestic corporation (in
other words, a bank).
 The Ugly: Distributions from the QDOT in excess of annual income are
subject to withholding of estate tax at the highest marginal rate.
Should US Domiciliaries be making gifts
to their non-citizen spouse?
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10. ESTATE AND GIFT TAX RATES
Applicable to U.S. Citizens or Domiciliaries:
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11. INBOUND GIFT OR INHERITANCE
ASSET TRANSFER ISSUES
• Intangible Assets
– Stocks, LLC & LP interests, patents, copyrights, etc.
– General rule—intangibles are located where the giver is located.
• Tangible Assets
– Real estate, equipment, automobiles, jewelry, artwork, etc.
– General Rule—tangible assets have situs where they are physically
located.
• But, what about cash, currency, bank accounts, etc.?
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12. U.S. ESTATE AND GIFT TAX TREATMENT
OF VARIOUS TYPES OF PROPERTY
Owned by a Non-citizen, Non-domiciliary
BEWARE!
The above table reflects general rules.
Actual determination of taxability can be heavily fact-specific.
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13. COMMON ESTATE PLANNING ISSUES FOR
CROSS-BORDER FAMILIES
• Inbound Cash Transfers Foreign Parent
– Gifts?
– Loans?
– Investments? Gift or Loan $
$ Investment
• Transfers of Stock/LLC interests? U.S. Child
Gift of
Stock
– U.S. Stock? Investment
$ Rent
– Foreign Stock? Entity
(Corp. LLC, et al)
Lease
• Foreign Trustees & Successor Trustees
– U.S. person is often preferable. Purchase $
$ Purchase
• U.S. income tax issues.
• U.S. reporting issues
• Logistics
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14. STRUCTURING FOREIGN INVESTMENT IN
U.S. REAL ESTATE
Foreign Person
Ownership Through Foreign Corp.
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition NO
Withholding Tax on Repatriation of Funds NO Foreign Corp.
Subject to U.S. Estate Tax NO(?)
Subject to U.S. Gift Tax NO
Branch Profits Tax YES
Tax Free Sale of Entity / Asset YES
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15. STRUCTURING FOREIGN INVESTMENT IN
U.S. REAL ESTATE
Foreign Person
Ownership Through U.S. Corp.
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition NO
Withholding Tax on Repatriation of Funds YES U.S. Corp.
Subject to U.S. Estate Tax YES
Subject to U.S. Gift Tax NO
Branch Profits Tax NO
Tax Free Sale of Entity / Asset NO
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16. STRUCTURING FOREIGN INVESTMENT IN
U.S. REAL ESTATE
Foreign Person
Ownership Through Foreign Corp
and U.S. Corp.
U.S. Tax System Exposure for Foreign Person NO
Capital Gains Rate (15%) on Disposition NO Foreign Corp.
Withholding Tax on Repatriation of Funds NO
Subject to U.S. Estate Tax NO U.S. Corp.
Subject to U.S. Gift Tax NO
Branch Profits Tax NO
Tax Free Sale of Entity / Asset YES
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17. STRUCTURING FOREIGN INVESTMENT IN
U.S. REAL ESTATE
Foreign Person
Direct Ownership
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition YES
Withholding Tax on Repatriation of Funds NO
Subject to U.S. Estate Tax YES
Subject to U.S. Gift Tax YES
Branch Profits Tax NO
Tax Free Sale of Entity / Asset NO
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18. STRUCTURING FOREIGN INVESTMENT IN
U.S. REAL ESTATE
Foreign Person
Ownership Through U.S. LLC
or Foreign LLC
U.S. Tax System Exposure for Foreign Person YES
Capital Gains Rate (15%) on Disposition YES
Withholding Tax on Repatriation of Funds NO U.S.or Foreign
LLC
Subject to U.S. Estate Tax YES(?)
Subject to U.S. Gift Tax NO
Branch Profits Tax NO
Tax Free Sale of Entity / Asset NO
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19. JOINT VENTURES WITH
OFFSHORE INVESTORS
• Single level of income tax
Foreign
Persons
• Qualifies for 15% preferential
cap gain
• No gift tax
• Some risk regarding estate tax
Foreign LLC
• Permits gifting between
partners
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20. FINANCING VEHICLES
Foreign Person
• Portfolio Interest Exemption
• Treaty Rates of Withholding Foreign Corp.
Loans
U.S. Corp.
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21. OTHER CONCERNS
• Section 1031 like-kind exchange transactions
– Permits tax deferral
– Strict statutory requirements
– U.S. property is only “like-kind” to other U.S. property, and
foreign property is only “like-kind” to other foreign
property
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22. ROGER ROYSE, ESQ. DAVID SPENCE, ESQ.
rroyse@rroyselaw.com dspence@rroyselaw.com
PALO ALTO | SAN FRANCISCO | LOS ANGELES
www.rroyselaw.com www.royseuniversity.com
TELEPHONE: 650.813.9700 | SKYPE: roger.royse
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties 22
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.