Foreign-Owned U.S. Real Estate Tx 8300

1. Foreign-Owned U.S.Real EstateTx 8300

2. Learning Objectives • Explain reason for FIRPTA, • Recognize structures resulting in ______, • Determine which companies are ______, • Identify ____ havens, and • Explain ___________ requirements You should be able to:

3. U.S. Source Capital Gain Pre-1980 Historical Perspective ECI Not ECI Regular Rates Exempt NRA < 183 days Regular Rates 30% NRA ≥ 183 days Regular Rates Exempt Foreign Corp

4. FIRPTA in a Nutshell • When foreign persons dispose of USRPIs, gain or loss is treated as __________ _________. • U.S. trade or business ___ required • Two types of USRPIs • ______ holdings in U.S. realty • Indirect holdings via ___ that is ______

5. U.S. Real Property Interests Foreign Corporation Foreign Corporation NRA NRA Domestic Corporation (USRPHC) U.S. Real Estate a. How many USRPIs do you see? b. How many are subject to FIRPTA if sold? U.S. Real Estate

6. Safe Havens • Interests held solely as ________ • Stock ________ traded on established securities market if holding ≤ __% • Interests in DCs that ______ themselves of USRPIs in _______ transactions • Stock held in U.S.-controlled _____

7. Example: USRPI The following unrelated persons own interests in Paradise Lost, Inc. (DC): Griffith (NRA) ___% of stock Bianca (NRA) 12% of ____ Forco ___% of stock If each person sells their interest at a gain, who has ECI?

8. U.S. Real Property Holding Corp • ___ corporation meeting test below at ___ time during the investor’s holding period or • Debt reduces _______ properties if proceeds used to acquire, _______, or maintain

9. Example: USRPHC Forco holds the following assets (listed at FMV) and secured debts: Business assets $300,000 Acquisition debt $250,000 Foreign realty ______ U.S. realty 480,000 Acquisition debt 150,000 Is Forco a USRPHC? If Leks (a NRA) sells his ___% holding of Forco shares on the NYSE, is his $25,000 gain ECI?

10. Investor’s Holding Period • Begins on the later of: • Day investor ________ stock or • Day 5 years ______ disposal of stock • Corporation must remain below ___% (or ___%) threshold on _____ day in the holding period to avoid USRPHC status

11. Example: Holding Period Forco1 and Forco2 own 50% interests in Domco. Though not a USRPHC now, Domco was a USRPHC until July 1, 2000. Each corporation sells their Domco shares on January 1, 2006, at a gain. If Forco1 bought its Domco shares on January 1, _____, and Forco2 purchased its Domco shares on January 1, 2004, which corporation must treat its gain as ECI? 1999 2001 2003 2005

12. USRPHC: Lower-Tier Entities • When testing for USRPHC status, how are ownership interests in _____ companies treated? or

13. USRPHC: Lower-Tier Entities • ____ _______ interests in flow-through entities • Look through controlling interests in ___________ • Treat non-controlling interests in USRPHCs as entirely ______ • ______ non-controlling interests in other corporations

14. Example: USRPHC Domco owns business assets (FMV $__), U.S. real estate (FMV $6), and an ___% holding (FMV $6) in Forco. Forco owns Ubusiness assets (FMV $__) and .S. real estate (FMV $1). Is Domco a USRPHC? Domco Forco Business Assets U.S. Real Estate Business Assets U.S. Real Estate

15. Example: USRPHC Domco owns business assets (FMV $5), U.S. real estate (FMV $4), and a ___% holding (FMV $__) in Forco. Forco owns business assets (FMV $3) and U.S. real estate (FMV $5). Is Domco a USRPHC? Domco Forco Business Assets U.S. Real Estate Business Assets U.S. Real Estate

16. Example: USRPHC Domco owns business assets (FMV $5), U.S. real estate (FMV $__), and a 30% holding (FMV $3) in Forco. Forco owns business assets (FMV $__) and U.S. real estate (FMV $4). Is Domco a USRPHC? Domco Forco Business Assets U.S. Real Estate Business Assets U.S. Real Estate

17. Applicable Determination Dates • ____ day of taxable year • Day cumulative USRPI acquisitions > _________ amount • Day corporation disposes of _______ realty • Day cumulative dispositions of _______ assets > separate limitation amount

18. Withholding Procedures • Transferees withhold 10% of amount ________ • IRS can determine “_______ tax liability” • Estimated, not _____ tax • Some dispositions are ______ from withholding

19. Example: Withholding Forco sells a Manhattan office building to Domco for $____ million. Forco’s adjusted basis is $60 million. Assuming a U.S. tax rate of 35% and no special arrangements with the IRS, how much should Domco transfer to Forco for the building?

20. Example: Withholding Forco sells a Manhattan office building to Domco for $100 million. Forco’s adjusted basis is $___ million. Assuming a U.S. tax rate of 35% and no special arrangements with the IRS, how much should Domco transfer to Forco for the building? What would you recommend to Forco?

21. Example: Withholding Ram owns a building in Atlanta that he sells to Sally for $_______. Ram’s adjusted basis is $150,000. Ram used the property for his accounting practice, but Sally will live in the building. Assuming a U.S. tax rate of 30% and no special arrangements with the IRS, how much should Sally withhold?

22. Let’s Review How does the U.S. treat capital gain a FC realizes from selling U.S. real estate if the FC is not engaged in a U.S. trade or business? How does the U.S. treat capital gain a FC realizes from selling corporate shares if the FC is not engaged in a U.S. trade or business?

23. Let’s Review Akon (NRA not engaged in U.S. business) owns 20% of Domco’s outstanding bonds. Domco owns U.S. realty worth $___ million, foreign realty worth $22 million, and other business assets worth $13 million. If Akon sells his interest in Domco and realizes a $2 million gain, how does U.S. law treat it?

24. Let’s Review Bromfield (NRA) owns all stock in a DC worth $_______ (basis $275,000). The DC owns U.S. realty worth $200,000 (basis $_______) and foreign realty worth $_______ (basis $25,000). If Bromfield desires to liquidate his investment, how should he proceed?

25. Brom FMV Basis DC U.S. Realty FMV Basis Foreign Realty FMV Basis

26. Let’s Review Baku (NRA) has a $_______ gain from selling Kansas farmland and $______ rental income from a triple net lease on Cleveland realty. Operating expenses related to the Cleveland property total $_______. How is Baku taxed on this income?

27. Let’s Review Baku (NRA) has a $_______ gain from selling Kansas farmland and $______ rental income from a triple net lease on Cleveland realty. Operating expenses related to the Cleveland property total $_______. Can Baku do anything to reduce U.S. taxes?

28. Let’s Review Baku (NRA) has a $_______ gain from selling Kansas farmland and $______ rental income from a triple net lease on Cleveland realty. Operating expenses related to the Cleveland property total $_______. Can Baku do anything to reduce U.S. taxes?

29. Let’s Review Bellingham (NRA) sells U.S. realty for $_______ ($_______ basis). Assuming no special arrangements, how much should the U.S. buyer withhold? Assuming U.S. tax rate of 30%, how much additional tax must Bellingham remit with his U.S. tax return?