1 I.R.C. §7701(a)(30). A trust is deemed a “US. person” if a court within the US. is able to exercise primary supervision over the administration of the trust, and one or more US persons have the authority to control all substantial decisions, of the trust.
2 I.R.C. §770l(b)(3)(A). Subject to certain exceptions, an individual meets the substantial presence test for any calendar (current) year if:
- he is present in the US. on at least 31 days during the year, and
- the sum of the number of days he was present in the US. during the current year and the two preceding calendar years, when multiplied by the applicable multiplier (1 for the current year, 1/3 for the ﬁrst preceding year, and 1/6 for the second preceding year) is at least 183.
3 Once an individual obtains green card status, the individual continues to be a lawful permanent resident until this status is either revoked or administratively or judicially determined to have been abandoned by the individual.
4 I.R.C. §770l(b)(1)(A). An alien who does not qualify as a resident alien for a calendar year under the green card test or the substantial presence test may elect to be treated as a resident alien for such year (provided certain qualifying tests are met).
5 l.R.C. §61.
6 I.R.C. §87l.
7 The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and speciﬁc items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Many of the individual states of the United States tax income which is sourced in their states. Therefore, you should consult the tax authorities of the state from which you derive income to ﬁnd out whether any state tax applies to any of your income. Some states of the United States do not honor the provisions of tax treaties.
8 See generally Convention Between the Gavernment of the United States of America and the Government of the State of Israel with Respect to Taxes on Income, U.S.-Isr. art. 3, para 4 (Jan. 1, 1995), available at www.irs.gov/pub/irs-trty/israel.pdf.
9 The factor most commonly determinative of an individual’s tax residency under the tie-breaker provisions of U.S. tax treaties is the location of the individual’s permanent home. Of course, this is a fact-intensive determination. In the event that both the US. and the treaty country equally weigh as the individuals permanent home, then the second evaluation is based on the individual’s personal and economic relations. This too is a fact-intensive determination, it requires an evaluation of which country hosts the individual’s "center of vital interests", such as the individuals family, social relationships, occupations, political involvement, cultural involvement, etc.
10 That is, after deductions are taken. Examples of deducin'ons typically taken with real property are taxes, operating expenses, ground rent, repairs, interest on any existing mortgages, and insurance premiums paid by the lessee on behalf of the foreign owner-lessor.
11 I.R.C. §87l(b). Currently the highest applicable rate is 35 percent. See l.R.C. §1(i)(2).
12 See, e.g., TREAS. REG. §1.864-2(e) (as amended in 1975).
13 InverWorld, Inc. v. Comm’r, T.C. Memo 1996-301 (TCM. 1996).
14 See generally Lewenhaupt v. Comm’r, 20 TC. 151 (1953), aff’d per curiam, 221 F.2d 227 (9th Cir. 1955); Pinchot v. Comm'r, 113 F.2d 718 (2d Cir. 1940); Piedras Negras Broadcasting Co. v. Comm’r, 43 ETA 297, 309-13 (B.T.A. 1941); Rev. Rul. 73-522, 1973-2 C.B. 226.
15 See, e.g., Linen Thread Co. v Comm’r, 14 TC. 725 (1950).
16 I.R.C. §871(a)(1). FDAP income includes items such as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emolument, and other ﬁxed or determinable annual or periodical gains, proﬁts, and income.
17 I.R.C. §871(b).
18 I.R.C. §864(c)(6).
19 I.R.C. §881(a)(1).
20 I.R.C. §871(a)
21 1.R.C. §871(b). See also I.R.C. §1(i)(2); I.R.C. §864(c)(2).
22 I.R.C. §864(c)(2)(A).
23 I.R.C. §864(c)(2)(B).
24 l.R.C. §871(d).
25 I.R.C. §1(i)(2).
26 The “long~term” classiﬁcation requires that the interest be held for over a year.
27 Another pitfall to individual ownership of US real estate by a foreigner is that the foreigner’s estate must be probated. Probate is a public process (taking six to nine months at best) whereby assets are frozen as title is transferred from the decedent to the one who inherits from the decedent. Quite likely the foreigner will not have a Florida will, and it is possible that the foreigner’s foreign will, if one exists at all, will not comply with Florida statutes. Thus, a situation can arise where the foreigner’s Florida condo passes at death as per Florida intestate laws, which could be contrary to the foreigner’s wishes. Furthermore, since foreigners only have a $60,000 estate tax exemption, it is likely that estate tax will be due upon the death of the foreign owner. If the foreigner does not have available liquid funds to pay estate tax, the real estate will probably be sold at a “ﬁre sale” to pay taxes. Thus, even though there are tax reasons why a foreigner should not own U.S. real property directly, there are also non-tax reasons (i.e., avoidance of probate) to not own U.S. real estate in an individual's name.
28 I.R.C. §87l.
29 I.R.C. §1231(a)(1). To the extent I.R.C. §1231 losses exceed I.R.C. §1231 gains, the losses are treated as ordinary losses. See I.R.C. §1231(a)(2).
30 I.R.C. §881.
31 I.R.C. §897(a)(l)(A). See also I.R.C. §87 1(b)( 1).
33 I.R.C. §2001;TREAS. REG. §20.0-1(b)(1) (as amended in 1994)
34 I.R.C. §§2101 and 2103.
35 For a complete deﬁnition and exceptions, see TREAS. REG. §20.2105-1 (as amended in 1974).
36 I.R.C. §2511
37 The modiﬁcation may be in the form of an increased exemption amount and/or an exemption of certain assets.
38 The countries with which the US. has estate tax treaties are Australia, Italy, Austria, Japan, Canada, Netherlands, Denmark, Norway, Finland, South Africa, France, Sweden, Germany, Switzerland, Greece, United Kingdom, and Ireland.
39 See I.R.C. §2001(c)(2).
40 I.R.C. §2102(b)(1).
41 I.R.C. §2056A.
42 The rates provided are for 2011 and are adjusted annually for inﬂation.
43 I.R.C. §2104(a).
44 I.R.C. §1222.
45 See I.R.C. §§2036, 2037, and 2038. Where a transferor retains certain rights in the transferred property, such as a right to income, a right to designate future beneﬁciaries, etc., the transferor shall not be deemed to have made a completed gift of such property and the value of the retained interest is included in the transferor’s gross estate. Consideration should be made to use a domestic self-settled trust in jurisdictions such as Nevada, Alaska, Delaware, and South Dakota.
46 I.R.C. §2501(a)(2).
47 Thus, estate tax avoidance can be achieved strictly through domestic entities. Consult with a qualiﬁed attorney to implement this strategy as it can be easily mishandled.
48 Rev. Rul. 76—103, 15976-1 CB 293 (ruling that creditors could reach the trust funds, so property was included in gross estate under I.R.C. §2038).
51 I.R.S. Priv. Ltr. Rul. 2009-44002 (October 30, 2009).
52 Note that if the settlor is not seeking estate exclusion, the transfer to the trust can also be structured as an “incomplete gift”, thus only providing asset protection beneﬁts (i.e., no estate exclusion).
53 I.R.C. §1222.
54 I.R.C. §2104(a).
55 I.R.C. §875(1); Sanchez v. Bowers, 70 F.2d 715 (2d Cir. 1934); REV. RUL. 55-701, 1955—2 CB 836 (ruling that a partnership’s place of business determined its situs for estate tax purposes under a treaty).
56 See Rev. Rul. 91-32, 1991-1 C.B. 107.
58 I.R.C. §1445.
59 I.R.C. §1445(e)(3).
60 I.R.C. §1445(e)(1).
61 I.R.C. §1441(a).
63 Or other pass-through entity, such as a limited liability company. In the case of an LLC, an election must be made (the “check the box” election) in order to have the LLC treated as a pass-through entity.
64 A detailed explanation of the two-tier partnership structure is beyond the scope of this article. For a comprehensive detailed explanation, see Robert F. Hudson, Jr., Presentation to the 29th Annual International Tax Conference: Tax Efficient Structuring of Foreign Corporate Investment in US. Real Estate and Business (Jan. 14, 2011).
65 I.R.C. §87l(a)(1).