Corporate Ownership of U.S. Vacation Home Risks Withholding Tax for Foreign Investors

In this episode we discuss the tax risks and provide insight into how foreign investors can manage them, discuss alternative structures such as trusts, and emphasize the importance of meticulous planning and consultation with tax professionals.

The US is a popular place for HNWIs to own vacation homes. But doing so individually comes with some often-overlooked tax consequences.

• Income tax on rental income and capital gains
• Estate tax on the value of the US real estate if the foreigner dies owning it
• FIRPTA withholding tax of 10% - 15% on the sale price when the property is sold

To mitigate the estate tax and FIRPTA withholding many HNW foreign investors purchase their US vacation homes through dual-corporate structure. Under the dual-corporate structure, the foreign investor sets up a foreign corporation that, in turn, sets up a US corporation that acquires the property.

This structure completely eliminates the estate tax and FIRPTA withholding tax when the property is sold. It does, however, come with hidden tax risks if the property is used personally, as a vacation home would be.

If the foreign investor doesn’t pay fair market rent for their use of the corporate owned vacation home, there will be a deemed dividend to the foreign parent equal to the value of the personal use. The deemed dividend is subject to withholding tax up to 30% without any allowance of deductions or possibly of refund.

Whether you already own a vacation home in the U.S., are considering investing in one, or are a professional advising clients on international real estate investments, this episode offers valuable guidance on minimizing tax liabilities while enjoying your investment to the fullest.

Download the Guide to Structuring U.S. Real Estate Investments for Foreigners here.

Want to know more about Trusts&Foundations? Find link to the guide here.