Foreign-Owned%20U.S.%20Real%20Estate%20Tx%208300

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Foreign-Owned U.S.Real EstateTx 8300
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Learning Objectives
You should be able to

1. Explain reason for FIRPTA,
2. Recognize structures resulting in ______,
3. Determine which companies are ______,
4. Identify ____ havens, and
5. Explain ___________ requirements

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U.S. Source Capital Gain
Pre-1980 Historical Perspective
ECI
Not ECI
Regular Rates
Exempt
NRA lt 183 days
Regular Rates
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NRA 183 days
Exempt
Regular Rates
Foreign Corp
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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 ______

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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
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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 _____

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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?

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U.S. Real Property Holding Corp

• ___ corporation meeting test below at ___ time
  during the investors holding period

or

• Debt reduces _______ properties if proceeds used
  to acquire, _______, or maintain

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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?

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Investors 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

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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?

2005
2003
2001
1999
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USRPHC Lower-Tier Entities

• When testing for USRPHC status, how are ownership
  interests in _____ companies treated?

or
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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

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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
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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
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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
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Applicable Determination Dates

• ____ day of taxable year
• Day cumulative USRPI acquisitions gt _________
  amount
• Day corporation disposes of _______ realty
• Day cumulative dispositions of _______ assets gt
  separate limitation amount

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Withholding Procedures

• Transferees withhold 10 of amount ________
• IRS can determine _______ tax liability
• Estimated, not _____ tax
• Some dispositions are ______ from withholding

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Example Withholding

• Forco sells a Manhattan office building to Domco
  for ____ million. Forcos 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?

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Example Withholding

• Forco sells a Manhattan office building to Domco
  for 100 million. Forcos 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?

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Example Withholding

• Ram owns a building in Atlanta that he sells to
  Sally for _______. Rams 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?

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Lets 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?

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Lets Review

• Akon (NRA not engaged in U.S. business) owns 20
  of Domcos 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?

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Lets 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?

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Brom
FMV Basis
DC
U.S. Realty FMV Basis
Foreign Realty FMV Basis
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Lets 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?

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Lets 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?

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Lets 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?

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Lets 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?