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Non-U.S. Persons Investing in the United States

Non-U.S. Persons Investing in the United States

Even modest foreign investments in the U.S. may raise transfer tax issues:When non-U.S. persons own U.S. situs assets, including real estate, U.S. corporation stocks, and tangible personal property (e.g., collectibles) that remain in the United States, they are generating a U.S. estate – one with a considerably miniscule exemption of only $60,000. If the investor resides in 1 of the 16 estate tax treaty countries, there may be significant relief, however.

Accordingly, and perhaps ironically, non-Americans are more likely to trigger federal transfer tax liability than a similarly situated U.S. citizen. While the foreign investor in the U.S. may become very aware of the federal (and possibly state) income tax regime, she might be well served by learning the particulars of the federal (and possibly state) estate tax regimes that could impact the distribution of those investments to her heirs. More sophisticated estate planning tools become necessary at more modest estate levels whenever the assets of a non-U.S. person are concerned.

Non-resident foreign (NRA) investors in U.S. real estate:  The United States can provide a very attractive market for investing in securities. For example, the situs rules discussed earlier illustrate that investments in U.S. publicly traded fixed-income (bonds) will not subject the foreign investor to estate taxes (nor income taxes). However, the United States has not extended the investor-friendly income and estate tax rules to foreign investment in U.S. real estate. As mentioned previously, foreign direct ownership of U.S. real estate will subject the non-resident’s estate to U.S. estate tax. Frequently, it will make sense to own U.S. Real Estate through an offshore corporate or trust structure (for a foreign, non-resident investor only, as U.S. persons should certainly avoid offshore corporate or trust structures) to avoid U.S. estate tax, and possibly reduce U.S. income tax as well.

From an income tax perspective, direct ownership of investment real estate will subject the foreign, non-resident investor to preparing the annual federal income tax (U.S. 1040-NR) and state income tax return. More concerning, it will also subject the foreign, non-resident to a more complicated tax regime – the Foreign Investment in Real Property Tax Act (FIRPTA) – which creates a myriad of tax headaches that are well beyond the scope of this article. This example merely highlights that certain classes of investments may be subject to more draconian reporting and taxation rules than other investments. Ultimately, competent financial planning and investment management must recognize and design an investment plan that takes full consideration of the cross-border tax issues.