Tax Planning For Chinese Investors in the U.S. Real Estate Market

Better Tax Planning for Chinese Investors

The main issue that Chinese investors face when investing money in the US real estate market is the direct investment which is subject to Foreign Investment in Real Property Tax Act (FIRPTA), also known as Section 897. What this section basivcally proposes is that any gain earned by a foreign investor on any US real estate property will be treated as any other gain earned by a resident on any US business or trade transaction. The amount of  taxes paid by the foreign investor would be similar to that paid by a citizen and filing of US federal and state income tax returns would be done in the same manner as well.

Here is what the Chinese investors can do to improve their tax planning when investing in American real estate:

If you are a foreign investor in U.S. real estate, and need tax planning advise, please call us at 407-344-1012, or email us at info@freedomtaxfl.com. Or visit www.freedomtaxaccounting.com

Invest as a Lender

You can make a smarter move by investing in USA's booming real estate as a lender instead of as a partner in property holding corporations. This can give you a chance to have the loan secured. The collateral does not make it a US real property interest and, hence, a non-participating loan is not subjected to FIRTPA regulations. Investors can also save FIRPTA taxation on an appreciation loan as a US real estate property is not liable under it when it comes to interest and principal amount. If the loans are deemed as debt for US federal income tax purposes, then these strategies can effectively give way for a lesser taxed investment and allows foreign investors to be a part of US real estate market

The taxation would be done in a manner which is the same as it is done when normally levied on other US property interests. A loan, by principal, is considered US real estate property interest if it participates or shares in the appreciative process of a property. If the interest is further qualified as a portfolio investment and the foreign investor is defined, they will be exempted under Code Section 892 in case of foreign government and the US tax Treaty, whichever is applicable.

Foreign Investment as Offshore Blocker

Another option Chinese investors can choose to take to lessen their tax burden is to invest as a shareholder in a domestic corporation as well as a lender to it instead of stepping into the real estate market as an equity investor. This way, your funds will be indirectly invested into the US real estate fund or the US real estate itself by the domestic corporation.

Real Estate Investment Trusts

Real Estate Investment Trust, or (REIT) in short, is a corporation that either owns or finances real estate properties that produce income. They can be a considerable option in case of tax planning for Chinese Investors. They are a good means to reduce US federal income taxation to a minimum or to completely avoid it. Once an REIT meets the requirements of tests, like asset, total income, nature of ownership and distribution, it can evade US federal income taxes which might otherwise be levied on foreign investors even though it itself would be seen as a corporation. Apart from a few exceptions, the rest of the profits from REITs will be subjected to FIRPTA laws.

If the ownership of a foreign investor in publicly traded REIT is at 5% or below, it will not be taxed according to FIRPTA regulations. They will be taxed under the regular conditions as there are for residents. The condition is also the same with 0% withholding and a period of one year calculated from the date of confirmation of the contract till the distribution date.

An REIT that has 50% of the share of stock in the name of resident owners would also be exempted from FIRPTA taxations under two conditions. These two conditions are;

1. Five year period that comes to an end on the date of the transaction in question


2. The period of existence of REIT

Among these two conditions, whichever is the shortest will be considered. This case of 50% ownership by US residents is called “domestically controlled” status.

Many foreign investors can also have their taxes exempted if they use private REITs as a holding unit. Though the US tax-exempt investors are able to obtain benefit from the fractions rule as well as the firm's qualification under such a norm, they are not subjected to FIRPTA taxations.

What companies or funds might do is that they may acquire US real estate interests and hold them under REIT. This would attract foreign investors, in this case, Chinese investors. Furthermore, such an investment can be ended by the sale of the REIT by the fund holding party.

However, it must be noted that any sale of US real estate interest by the REIT will be subjected to FIRPTA taxations for non-US investors without any difference, whether the REIT has the status of being domestically controlled or non-controlled. 



source: http://freedomtaxaccounting.com/tax-planning-for-chinese-investors-in-the-u-s-real-estate-market/​