Some Alternative Methods for Foreign Investor to Take Title to U.S. Residential Real Property

BENEFITS AND BURDENS OF SOME ALTERNATIVE METHODS FOR A FOREIGN INVESTOR TO TAKE TITLE TO U.S. RESIDENTIAL REAL PROPERTY ____________________________________

U.S. Residential Real Property held by PARTNERSHIPS (including Limited Liability Companies)

BENEFITS

• U.S. Income Tax.

(a) Upon Receipt of Rental Income. Taxation of operational income will be passed through to the partners, hence individual rates will apply.

(b) Upon Sale. Gain will be taxed to the partners. With individual partners, they will enjoy the 15 percent long term capital gain tax rate. 

• U.S. Gift Tax. Gifts of partnership interests are gifts of intangible property, so no gift tax is imposed (IRC § 2501(a)(2)).

BURDENS 

• Disposition of Assets. Does not provide for an orderly disposition of assets upon death of partner. 
• U.S. Estate Tax. There is a debate about whether estate tax applies or not, as follows:

(a) Partnership situs is where the business is (IRS view). The conservative view is that a partnership interest will be U.S. situs property (subject to the U.S. estate tax on death of nonresident aliens) when the partnership is engaged in a U.S. trade or business (Treas. Regs. § 20.2104-1(a)).

(b) Partnership situs is where it is formed. This theory says that the foreign partnership has a foreign situs if its local law treats it as an entity separate from its partnership, and death of the partner does not terminate the partnership.

(c) Partnership situs is where the nonresident is domiciled. This theory says that interests in a foreign partnership should be non-U.S. situs assets under the maxim which states that intangible personalty has its situs at the domicile of the owner and its transfer on his death may be taxed there.