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It seems like most foreign buyers, at least from what we've seen in the NYC market, either buy property in a LLC or in their own name. They either don't care, or don't want to think about the consequences of US estate taxes if they die, but have assets located in the US.
The truth is, foreigners have very little protection from US estate taxes. While US Citizens and Permanent Residents get an exemption of $11.4 million per individual ($22.8 million per couple), a nonresident alien only gets an exemption amount of $60,000. Everything above that exemption amount gets hit with a Federal 40% estate tax.
Keep in mind that some states, like New York, have their own estate tax. New York's estate tax can apply even if the person was not a New York State resident at the time of death, but simply because the person had property located in-state.
New York State has an exemption from the estate tax if the estate is under $5,740,000, with a 5% overage limit, meaning they'll give you a break if you're over that limit by a little bit (within 5%). However, NY State has a cliff, which means if you are more than 5% over that exemption amount, the entire amount of your estate is subject to New York's estate tax.
The top NY estate tax rate is 16% and kicks in once your NY taxable estate is over $10,100,0000. Amounts below that are subject to progressive increases in tax rates, starting at 3.06% for the first $500,000.
As a result, a foreigner owner of let's say a $100mm condo in Manhattan who dies will only get $60,000 exempted from Federal estate taxes. This foreign owner would owe 40% in Federal estate tax on anything above $60,000. Furthermore, this foreigner who dies would owe an additional 16% on anything over $10,100,000 and lower graduated tax rates on amounts below that. But very importantly, this foreigner who dies would owe NY State estate tax (at varying rates) on the entire $100mm, assuming that's what the property is valued at death and assuming that's the only asset the person has in NY.
This is incredibly onerous and will almost certainly require the heirs to sell the property (who has $50mm+ in cash lying around to pay US estate taxes?).
So how can foreigners get around this? What do sophisticated accountants typically do for their clients?
Here's what typically happens. A sophisticated foreign buyer will form a company in a friendly tax jurisdiction like the Channel Islands, The Cayman Islands, Luxembourg or the British Virgin Islands. This offshore company will the be the sole owner of domestic LLC which is then the sole owner of the US property.
However, this domestic company which owns the property will need someone who is a US Citizen to sign documents on behalf of the LLC, even if this person is just as the manager of the LLC. This person doesn’t need to be an owner, and as a result foreign buyers will often ask and have their real estate brokers sign off as the LLC's manager. This actually can make sense because perhaps this real estate broker is really the manager of the property, and is helping the foreign owner out by managing the property and renting it out. The broker can sign an agreement with the foreign owner to relieve themselves of any liability.
In any case, this protects the foreign owner upon death from these extremely high estate taxes, and as a further benefit you won't have to comply with FIRPTA withholding.
Can you do this after you've already closed on the property in your own name?
Yes, it's possible to do this maneuver if you've already purchased the property in your own name. If you do it after close and you just transfer ownership to a LLC, it could be considered as just a change in identity which might not trigger tax consequences such as FIRPTA.
Remember guys, this is complicated stuff, and you need to speak to an accountant if this pertains to you. As always, this is just my personal opinion and not meant as tax or accounting or legal advice. Cheers!
The truth is, foreigners have very little protection from US estate taxes. While US Citizens and Permanent Residents get an exemption of $11.4 million per individual ($22.8 million per couple), a nonresident alien only gets an exemption amount of $60,000. Everything above that exemption amount gets hit with a Federal 40% estate tax.
Keep in mind that some states, like New York, have their own estate tax. New York's estate tax can apply even if the person was not a New York State resident at the time of death, but simply because the person had property located in-state.
New York State has an exemption from the estate tax if the estate is under $5,740,000, with a 5% overage limit, meaning they'll give you a break if you're over that limit by a little bit (within 5%). However, NY State has a cliff, which means if you are more than 5% over that exemption amount, the entire amount of your estate is subject to New York's estate tax.
The top NY estate tax rate is 16% and kicks in once your NY taxable estate is over $10,100,0000. Amounts below that are subject to progressive increases in tax rates, starting at 3.06% for the first $500,000.
As a result, a foreigner owner of let's say a $100mm condo in Manhattan who dies will only get $60,000 exempted from Federal estate taxes. This foreign owner would owe 40% in Federal estate tax on anything above $60,000. Furthermore, this foreigner who dies would owe an additional 16% on anything over $10,100,000 and lower graduated tax rates on amounts below that. But very importantly, this foreigner who dies would owe NY State estate tax (at varying rates) on the entire $100mm, assuming that's what the property is valued at death and assuming that's the only asset the person has in NY.
This is incredibly onerous and will almost certainly require the heirs to sell the property (who has $50mm+ in cash lying around to pay US estate taxes?).
So how can foreigners get around this? What do sophisticated accountants typically do for their clients?
Here's what typically happens. A sophisticated foreign buyer will form a company in a friendly tax jurisdiction like the Channel Islands, The Cayman Islands, Luxembourg or the British Virgin Islands. This offshore company will the be the sole owner of domestic LLC which is then the sole owner of the US property.
However, this domestic company which owns the property will need someone who is a US Citizen to sign documents on behalf of the LLC, even if this person is just as the manager of the LLC. This person doesn’t need to be an owner, and as a result foreign buyers will often ask and have their real estate brokers sign off as the LLC's manager. This actually can make sense because perhaps this real estate broker is really the manager of the property, and is helping the foreign owner out by managing the property and renting it out. The broker can sign an agreement with the foreign owner to relieve themselves of any liability.
In any case, this protects the foreign owner upon death from these extremely high estate taxes, and as a further benefit you won't have to comply with FIRPTA withholding.
Can you do this after you've already closed on the property in your own name?
Yes, it's possible to do this maneuver if you've already purchased the property in your own name. If you do it after close and you just transfer ownership to a LLC, it could be considered as just a change in identity which might not trigger tax consequences such as FIRPTA.
Remember guys, this is complicated stuff, and you need to speak to an accountant if this pertains to you. As always, this is just my personal opinion and not meant as tax or accounting or legal advice. Cheers!
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