During U.S's "great recession" beginning in 2008 when the exchange rate between the dollar and the real plummeted to as low as 1.5 reais:1 dollar, Brazilians flocked to Florida to purchase vacation homes on the beach, second homes and investment properties. While owing a home or investment property in Florida or anywhere in U.S can be a great investment, it can also come with many unexpected surprises for uninformed foreigner buyer. For example, a Brazilian citizen who purchases the perfect vacation home in Miami without proper planning could be forced by the United States Internal Revenue Service (IRS) to pay a 40% estate tax when the property is transferred following his death. Additionally, this same Brazilian, should he chose to transfer title of this property prior to his death to his children or other family members, could also be hit with a equally harsh gift tax.
This article is intended to serve as a mere introduction to some of the tax consequences that may arise when creating an estate plan for a non-domiciled foreign citizen for U.S. inheritance and gift purposes. This area of the U.S. tax code is very complex and as such we recommend that foreign homeowners consult with an attorney specializing in international estate planning regarding their unique situation. The IRS penalties associated without proper planning are too harsh to be ignored and foreigner homeowners must be proactive in understanding the consequences of various estate planning actions.
The Estate Tax
The U.S. estate tax is a tax on your right to transfer property at your death. In general, property located in the United States that is owned by a non-domiciled foreign citizen is subject to the estate tax. U.S. situs assets for estate tax purposes includes some of the following: U.S. situs real property, including houses and condominiums; U.S. situs tangible personal property including jewelry, antiques, artworks, cars; and shares of stock of U.S. corporations. Bank accounts, including checking and savings accounts, time deposits and certificates of deposit maintained with U.S banks are not characterized as U.S situs property.
When purchasing property in the United States, many Brazilians and other foreigners are not overly concerned with the estate tax as this tax in most Latin American countries is relatively low. Currently in Brazil, the estate tax is around 8%. However, the estate tax in the U.S. is currently at 40%. While the majority of U.S. residents are not affected by this high rate (because $5,430,000,00 is deductible), non-domiciled foreign citizens are only granted a deduction of $60,000. Thus, estate tax is due when a non-domiciled foreign citizen transfers property located in the United States above $60,000.
The Gift Tax
The IRS also imposes a federal gift tax on money or property given during your life. This gift tax is imposed on the transfer of property located in the U.S. and also applies to non-domiciled foreign citizens. Generally, non-domiciled foreign citizens are subject to gift tax only on transfers of real or tangible personal property situated in the U.S. Thus, gifts of intangible property by a nonresident are generally exempt from gift tax. However, careful planning is required because foreigners are generally limited to an annual exemption of $14,000 per year. While gifts of shares of stock of U.S. corporations are not subject to the U.S. gift tax, gifts of cash that take place within the U.S. are subject to this tax. Therefore, it is recommended that any gifts of cash made by a non-U.S. person to a U.S person be made outside of the United States.
Proper Planning to Minimize or Avoid Tax Consequences
While the U.S. tax scheme is particularly harsh against non-domiciled foreign citizens, there are several devices that can be employed to minimize or avoid the tax consequences. For example, popular devices used by non-domiciled foreign citizens holding property in the U.S. include LLCs, foreign corporations and irrevocable trusts. It is commonly recommended that non-domiciled foreign citizens hold U.S. real property and tangibles located in the U.S. in non-U.S. corporations. While holding property in this manner will not protect against income taxes, it can offer protection against the estate and gift tax. However, each of these devices should be carefully considered before using as each has many "pros" and "cons". For example, while one device might be beneficial to minimizing the estate and gift taxes, it may be associated with high income taxes. To determine which vehicle is best for your situation, you should consult an attorney specializing in international estate planning issues.
Golden Rules to Minimize U.S. Taxes
To minimize U.S. taxes, there are a couple golden rules that are recommended for the non-domiciled foreign citizen considering purchasing property in the U.S. First, minimize contacts with the U.S. to avoid becoming classified as a U.S. resident under the tax code. Second, minimize U.S. situs assets to avoid estate taxation (ie hold real property located in the U.S. in a non-U.S. corporation). Third, while this article does not specifically address U.S. income taxes, non-domiciled foreign citizens should minimize taxable U.S source income to avoid U.S. income taxation.
If you own real property in Florida or are considering purchasing property in the U.S., we strongly advise that you consult with an attorney who specializes in international estate planning prior to the purchase to ensure that proper precautions are taken to avoid harsh tax consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.