Conversion of Real Estate to Non-US Situs Property
Non-Resident Alien (NRA) is subject to transfer tax only on US situs property. Estate tax will be imposed only on the NRA’s property which at the time of death is situated within the U.S. Id. §2103, §2101(a). Gift tax will be imposed on the NRA donors only if the property is situated within the U.S. Id.§2511(a).
If NRAs purchase the US situs real estate, the value of the property will be included in their taxable estate when they die. They may be able to avoid this situation by purchasing the property through their foreign corporation. The stock issued by a foreign corporation is deemed not within the U.S. regardless of where the certificate is physically located. Therefore, although the real estate is situated in the U.S., since the assets which the NRAs are holding are just stocks of the foreign corporation, the value of the real estate (or stock) will not be included in their taxable estate.
The foreign corporation must be the initial purchaser of the real estate since once NRAs own the US real estate, the transfer of the property to the foreign corporation will likely expose them to the unwelcome tax liability.
Please keep in mind, however, that this planning may be problematic for US income tax purpose. FIRPTA (Foreign Investors in Real Property Tax Act) imposes an income tax withholding to this type of scheme. Buyers or transferees will be responsible for withholding income tax on the disposition (sale, rental, gift, exchange, etc.) of US situs real estate interest (which includes the share of property holding corporation) that is held by a non-US person (or corporation). Selling the real estate later will be subject to this FIRPTA withholding of 15% of the amount realized at the closing.
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