Foreign Investment in U.S. Real Estate: Reporting and Avoiding Withholding, Holding Structures, ECI and FDAP

There are many reasons nonresidents purchase real estate in the U.S. NRAs may purchase property in the U.S. as an investment, a business holding, or a second or vacation home. Unless income is effectively connected to a U.S. trade or business, it is generally not subject to U.S. taxation. Enter Section 897 of the IRC, which statutorily classifies gain from the disposition of U.S. real estate as effectively connected income (ECI) and subject to U.S. tax. Additionally, Section 1445(a) requires that transferees of a USRPI must withhold and remit a 15 percent tax on these sales.

Adding another layer of complexity is determining the tax consequences of holding USRPI before its sale. ECI and FDAP (fixed and determinable annual or periodic income) rules determine taxation of current year income. FDAP income is generally taxed at a flat rate of 30 percent, with no deductions permitted. ECI is taxed after deductions; however, an election is often required for the income to be treated as ECI. Tax professionals working with NRAs that own real estate in America must understand the nuances of these complex regulations.

Listen as our panel of international tax experts explains the differences between ECI and FDAP, holding structure considerations for nonresidents owning U.S. real property, and withholding requirements (and avoiding withholding) on sales of U.S. property by NRAs.

I. FIRPTA, an introduction

II. Effectively connected income

III. Fixed and determinable periodic or annual income

IV. Withholding

A. Current income

B. Sales proceeds

V. Ownership structures

The panel will review these and other key issues:

• Which taxpayers are subject to mandatory withholding on sales of U.S. real estate?
• What criteria must be met for income from U.S. real estate to be categorized as ECI?
• Who is obligated to withhold and remit withholding taxes under Section 1445(a) on property transfers?
• Under what circumstances should an NRA consider holding a U.S. real estate interest in an LLC?

Learning Objectives

After completing this course, you will be able to:

• Distinguish between ECI and FDAP
• Recognize the various tax treatments a foreign investor in U.S. real estate receives based upon entity choice
• Ascertain who is obligated to withhold and remit withholding taxes on property transfers
• Establish the criteria that must be met for income from U.S. real estate to be categorized as ECI

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience at mid-level within the organization, supervising other preparers/accountants, in tax planning and preparation of complex tax forms and schedules for foreign investors in U.S. real estate. Specific knowledge and understanding of the IRS rules governing foreign investment in U.S. real estate, familiarity with relevant taxes including: income, withholding, FIRPTA, estate and gift; and working knowledge of the tax impact of using different ownership structures including: U.S. LLC, foreign corporation, U.S. corporation, trust or individual ownership.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).