I am CPA Maximiliano Mira Salas, partner at FINANCERS, and on this occasion I want to explain how proper tax and corporate planning can optimize the taxation of real estate investments in the United States, while mitigating succession risks such as the Estate Tax.

Tax Context:

Direct real estate investment in the U.S., made either personally or through a disregarded entity LLC, exposes the foreign investor to:
• Estate Tax: federal inheritance tax applicable to assets located in the U.S., with a marginal rate that can reach up to 40% on the gross value of the property at the time of the owner’s death.
• U.S. source income tax: income from rentals or real estate capital gains is taxed as Effectively Connected Income (ECI), with progressive rates up to 37% if the LLC retains its tax transparent status.

Limitations of a “stand-alone” LLC:

Contrary to what many investors believe, forming an LLC without a superior corporate structure does not eliminate exposure to the Estate Tax, nor guarantee income tax optimization.

Also, if no tax election (check-the-box election) is made to treat the LLC as a corporation (C-Corporation), the entity remains disregarded and the income is taxed directly in the hands of the foreign owner.

Recommended Strategy: LLC Owned by an Offshore Entity

An advanced and legally valid strategy for non-resident investors is to form a foreign entity (for example, a Limited Company in the BVI) that owns 100% of the shares of the U.S. LLC.

This allows to:

Eliminate direct exposure to Estate Tax, since shares or interests in foreign entities are not considered “U.S. situs assets” for succession purposes under U.S. tax code.
Enable the LLC to elect tax treatment as a C-Corporation (Form 8832), accessing a fixed corporate tax rate of 21% on net real estate income, without direct taxation to the foreign partner.
Protect the family estate, avoiding probate proceedings in the U.S. in case of death.
Facilitate the transfer of offshore ownership interests, operating through foreign shares governed by the laws of the chosen offshore jurisdiction (BVI, Nevis, Cayman Islands, among others).

Aspects to Consider:

Despite the benefits mentioned, this structure:
• Does not exempt payment of federal and state taxes on real estate income generated in the U.S., which will still be taxed as ECI through the U.S. taxable entity.
• Does not eliminate the application of local taxes (property tax, transfer tax, etc.) at the state and municipal levels.
• May require additional compliance, such as filing reports with the Financial Crimes Enforcement Network (FinCEN) via the Beneficial Ownership Information (BOI) Report, and regulatory compliance of the offshore country.

Legal Considerations:

This communication is for informational purposes only and does not constitute legal or tax advice. Each case must be evaluated individually, considering the tax specifics of the investor’s country of residence, global estate, and applicable international treaties.

At FINANCERS, we provide comprehensive professional advice to design corporate and tax structures tailored to each investor, ensuring regulatory compliance and international tax efficiency.

If you want to explore how to structure your real estate investment in the U.S. with criteria of tax and succession efficiency, schedule a personalized consultation with our technical team.

CPA Maximiliano Mira Salas
International Tax Advisor | FINANCERS