According to a recent study by Florida Realtors, 19% of the total residential sales volume was by foreign investors. By foreign investors, we are referring to individuals who have another Country as their primary residence and are purchasing a second home or other real estate in Florida.
Methods to Hold Title
It becomes prudent to evaluate the methods by which said individuals may own title to Florida real estate, and the advantages or disadvantages of various ownership alternatives. Through this series of articles, we will be evaluating ownership in a person's individual name, ownership through a Florida Living Trust, ownership through a Florida corporation or a Florida Limited Liability Company.
Ownership in a person's individual name (Direct Ownership)
The simplest way for a foreign investor to purchase real estate in Florida is in her or his individual name. This avoids the cost of creating a living trust and transferring the property thereto, or the cost of creating and maintaining a domestic corporation or limited liability company.
Tax consequences of any type of ownership
Regardless of the type of entity by which a foreign investor elects to hold title, said individual should seek independent counsel and advice pertaining to income tax and estate ramifications in both the United States and the individual's country of residence.
Probate issues - Direct Ownership
If a foreign investor dies owning Florida real estate, and if his primary residence is in a country other than the United States, title to the Florida real estate can be passed through a probate process following the procedure of using the individual's Last Will and Testament from his country of origin. In legal terms, this probate process is called an ancillary administration.
How can probate be avoided?
One of the simplest ways for a foreign individual to own title to Florida real estate is to create a Florida Living Trust and have the real estate transferred to said trust. Upon the death of the foreign individual, the successor trustee could transfer title to the real estate in accordance with the wishes of the deceased. This is a very good way for title to be held.
Up next we will discuss how title to real estate can be held by foreign individuals using a Florida Corporation or a Florida Limited Liability Company.
Methods to Hold Title
As stated in the earlier article of this series, a recent study by Florida Realtors indicated that 19 percent of the total residential sales volume was by foreign investors over the past year. As such, it becomes prudent to evaluate the methods by which foreign investors may own such real estate in Florida and the advantages and disadvantages of each ownership alternative. Through this series of articles we will continue evaluating the alternative forms of ownership for foreign investors including direct ownership by a foreign individual (Discussed in Part I), investment in real estate through a limited liability company (Discussed in this article), investment in real estate through a foreign corporation and investment in real estate through a living trust (To be discussed in the future).
Benefits of Ownership by Foreign Individual(s) through an LLC
Many foreign investors choose to form an LLC to manage their investment property as opposed to other forms of ownership. Ownership through an LLC can include liability limitations and possible tax advantages. For example, if investment property is owned by an LLC and used as a rental property and a tenant injures himself or herself on site, in most circumstances the judgment would be limited to assets of the LLC and not personal assets of any of the LLC owners. Also, if the LLC were to incur debt, this would generally not attach to the individual owners. Recent legislation, referred to as the Olmstead patch amendment, is intended to eliminate any question about the scope of the remedies available to creditors in the context of a Florida LLC.
Consequences of Ownership by Foreign Individual(s) through an LLC
Owning investment property in an LLC, as opposed to direct ownership, may cause the loss of certain individual rights. While Florida law does not require an LLC to have an operating agreement, operating an LLC without one can have its drawbacks if the default provisions of Florida LLC law do not meet the needs and expectations of the owners. To avoid this situation, owners of an LLC often adopt an operating agreement tailored to their business needs. But, such agreements can also have drawbacks. Limitations on owners specified in an LLC operating agreement are legally enforceable restrictions that can just as easily work against them should a disagreement develop. Such enforceable restrictions within an operating agreement may include how an owner may devise, sell, or manage his share of the property.
In many instances, banks are not readily willing to offer loans to LLCs without personal guarantees. Moreover, a limited liability company is classified as a corporation for Florida and federal income tax purposes and, as such, is subject to the Florida Income Tax Code and must file annually.
Tax consequences of any type of ownership
Regardless of the type of entity by which a foreign investor elects to hold title, said individual should seek independent counsel and advice pertaining to income tax and estate ramifications in both the United States and the individual's country of residence.
Now we will discuss how title to real estate can be held by foreign individuals using a foreign corporation or through a living trust.
Advantages and Disadvantages of Ownership Alternatives
As stated in earlier articles of this series, a recent study by Florida Realtors indicated that 19 percent of the total residential sales volume was by foreign investors over the past year. As such, it becomes prudent to evaluate the methods by which foreign investors may own such real estate in Florida and the advantages and disadvantages of each ownership alternative. Through this series of articles, we will continue evaluating the alternative forms of ownership for foreign investors including direct ownership by a foreign individual (Discussed in Part I), investment in real estate through a limited liability company (Discussed in Part II), investment in real estate through a foreign corporation (Discussed herein), and investment in real estate through a living trust (To be discussed in the future).
Ownership of Florida Real Estate through a Foreign Corporation
A foreign corporation is often the investment vehicle of choice for a foreign investor that is investing significant amounts of money in Florida residential real estate. By purchasing Florida real estate directly through a Foreign Corporation (i.e., a corporation that is registered to do business outside of the United States), estate taxes may be avoided at the time of the foreign investor's demise. This is due to the fact that stock of the foreign company based outside the United States is not deemed to be a "U.S. situs asset" for estate and gift tax purposes.
Consequences of Ownership of Florida Real Estate through a Foreign Corporation
While there are benefits to direct investment in Florida real estate via a foreign corporation, this type of investment structure may not always be the best option. This is due to the fact that foreign corporations directly investing in Florida real estate are subject to numerous tax implications. For instance, the foreign corporation's taxable sale of the Florida real estate is subject to the Foreign Investment in Real Property Tax Act (FIRPTA). The FIRPTA, embodied in Section 897 of the Internal Revenue Code, applies to dispositions of U.S. real property interests made by nonresident alien individuals and foreign corporations. A "nonresident alien" is defined in Section 7701(b)(1)(B) as an individual who is neither a U.S. citizen nor a U.S. resident. Furthermore, since the real estate would be held by a foreign corporation, it would not qualify for a "step-up" in basis to fair market value at the time of the foreign investor's death.
Ownership of Florida Real Estate through a Foreign Corporation via a Subsidiary
Although some foreign investors may prefer to directly purchase Florida real estate through a foreign corporation, the various tax implications may create the need for most foreign investors purchasing less significantly priced residential property to look to other alternatives. One possible alternative to directly purchasing Florida real estate by a foreign corporation is the creation of a Florida based subsidiary. By creating a Florida based subsidiary corporation and purchasing Florida real estate indirectly, the FIRPTA would not apply. As such, if the Florida real estate is sold under this structure of investment, only a single level of tax is required and the proceeds of the sale can then be distributed to the foreign corporation free of U.S. withholding tax. Subsequently, the foreign corporation can pay the proceeds to its foreign investor shareholder with no further U.S. tax implications.
Tax consequences of any type of ownership
Regardless of the type of entity by which a foreign investor elects to hold title, said individual should seek independent counsel and advice pertaining to tax and estate ramifications in both the United States and the individual's country of residence.
Now we will discuss how title to real estate can be held by foreign individuals using a living trust.
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Methods to Hold Title
As stated earlier, a recent study by Florida Realtors indicated that 19 percent of the total residential sales volume was by foreign investors over the past year. As such, it becomes prudent to evaluate the methods by which foreign investors may own such real estate in Florida and the advantages and disadvantages of each ownership alternative. Through this series of articles we will continue evaluating the alternative forms of ownership for foreign investors including direct ownership by a foreign individual (Discussed in Part I), investment in real estate through a limited liability company (Discussed in Part II), investment in real estate through a foreign corporation (Discussed in Part III), and investment in real estate through a living trust (Discussed in this article).
Living Trust
A revocable, or "living," trust is often promoted as a means of avoiding probate and saving taxes at death. Additionally, a living trust may also be a beneficial method by which foreign individuals can own real estate in Florida. A living trust is a document (the "trust agreement") created by a person to manage their assets during their lifetime and distribute the remaining assets after their death. The person who creates a trust is called the "grantor." The person responsible for the management of the trust assets is the "trustee." The grantor can serve as trustee, or they may appoint another person, bank or trust company to serve as their trustee. The trust is "revocable" since the grantor may modify or terminate the trust during their lifetime, as long as they are not incapacitated.
Benefits of Ownership by Foreign Individual(s) through a Living Trust
In Florida, a person can create a living trust to avoid probate for virtually any or all of the assets they own real estate, bank accounts, vehicles, and so on. Unlike testamentary trusts (which only become effective upon death) the grantor of a living trust can retain complete control over all of their assets. Consequently, while a foreign investor may technically place his Florida real estate in a living trust, they still can have control over such assets while living and serving as trustee. Because the grantor retains control of the living trust during their lifetime, they can sell or otherwise deal with the assets of the trust without involving anyone else. Furthermore, the living trust may serve as incapacity planning. In the event of an unexpected incapacity of the grantor/trustee, the trustee's successor would assume control over the trust and act accordingly within the provisions of the trust.
A revocable trust may avoid probate by affecting the transfer of assets during the grantor's lifetime to the trustee. This avoids the need to use the probate process to make the transfer after grantor's death, since upon death the trustee (or trustee's successor if the grantor served as the initial trustee) is responsible for paying all claims and taxes, and then distributing the assets to the beneficiaries as described in the trust agreement. The trustee would have immediate authority to manage the trust assets at the grantor's death; appointment by the court is not necessary. This avoidance of probate may lower the cost and time delays of administering a foreign individual's estate.
Recently, a foreign investor from France utilized the aforementioned method and placed three separate real estate properties in Pinellas County, Florida into a living trust. The existence of the trust will enable his children who are serving as successor trustees to transfer of all three properties, one to each child, without the need to pass through probate. The living trust was created in addition to previously held trusts in his home country.
Tax consequences of any type of ownership
Regardless of the type of entity by which a foreign investor elects to hold title, said individual should seek independent counsel and advice pertaining to income tax and estate ramifications in both the United States and the individual's country of residence.
The law firm of DeLoach, Hofstra & Cavonis, P.A., is very knowledgeable concerning all aspects of the creation of living trusts.
