Investing for Survival

 Investing for Survival—Owning Foreign Property

            First, these two gems:

The latest from Bill Gross (medium and an absolute must read):

            http://www.zerohedge.com/news/2013-05-01/bill-gross-there-will-be-haircuts

            And if that doesn’t get you a bit nervous, watch this two minute video from my favorite eurocrat:

            http://www.zerohedge.com/news/2013-04-30/nigel-farage-wholesale-violent-revolution-europe

What FATCA Means for Owning Foreign Property

By Nick Hodges

The basic intent of FATCA is to press foreign banks to disclose the financial assets of U.S. citizens in overseas accounts. © Alexandr Denisenko

You’ve found your perfect retirement paradise overseas and your attorney has recommended that you establish a foreign corporation and have it own the property for you.

You’ve looked at the legal side of this and it makes a lot of sense. However, as the Foreign Account Tax Compliance Act (FATCA) regulations take effect, you have additional tax and reporting issues to consider.

The basic intent of FATCA is to press foreign banks to disclose the financial assets of U.S. citizens in overseas accounts, including brokerage accounts, insurance policies, and directly-held securities. As it rolls out, it’s reaching into much broader arenas of reporting requirements…ones that may affect you if you own foreign real estate. Let’s look at the several ways you can own foreign real estate, along with your U.S. tax filing and reporting requirements.

Owning in Your Own Name: Owning foreign real estate in your own name is the simplest way to own real estate for tax and reporting purposes: It is just like owning real estate in the U.S. At the time of writing, there are no additional IRS tax or disclosure forms that you need to file. If—like a lot of folks—you want to travel or live part-time in a place and are considering renting out your overseas home, then reporting requirements are just like those if you were to rent your home out in the U.S. You need to report all the rental activity with your annual Form 1040, generally filed on a Schedule E.

Through a Foreign Corporation: Sometimes, it’s just not practical to own foreign property in your own name. To protect you, your foreign attorney will recommend that you set up a foreign corporation or buy the foreign corporation that already owns the property. While you still consider it your property, with FATCA, the IRS views your ownership somewhat differently:

• You do not personally own the real estate.

• A foreign corporation owns the real estate.

• You own shares in the foreign corporation that owns the real estate.

• These shares in the foreign corporation are identified by FATCA as a Foreign Financial Asset.

Your U.S. tax return is going to look very different.  Here are some of the forms you’ll need:

• If you transferred more than $100,000 to the corporation to acquire the property, you will need to file Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation).

• If you have rental activity associated with the property, you will need to file Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

• Based on your personal income thresholds, filing status, and the value of the property, you may need to file Form 8938 (Statement of Foreign Financial Assets). There’s an initial penalty of $10,000 for failure to file each of these forms.

Through a Bank Trust: Have you fallen in love with the coast of Mexico? Regardless of the tax issues, if you are buying property within 50 kilometers of the coast there (or 100 kilometers of the border), you can’t hold it in your own name. It needs to be held in a bank trust also known as a fideicomiso trust. It’s referred to as a bank trust because the government of Mexico requires that a bank be named as a trustee.

In your own name…no reporting required.”

Property held in the fideicomiso is owned and controlled by you and it’s a 50-year term and renewable; a very common way for U.S. citizens to hold property in Mexico. Owning foreign property through a bank trust falls into the general tax category of Foreign Trusts, which are generally reportable to the IRS.

In addition to the forms required for foreign corporate ownership above, you will need to consider these forms:

• If you move money into a foreign trust in order to acquire the property, you will need to file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts).

• If the foreign trust names you as the trust owner, you will need to file Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner).

Currently, there is controversy over whether or not ownership through a bank trust falls into the definition of a Foreign Financial Asset. I’ve observed that the IRS is defining a Foreign Financial Asset in the broadest possible context, and for my clients with a fideicomiso trust, I recommend filing the additional forms and disclosures with the IRS to avoid any penalty assessments in the future.

Other Considerations: The above are the most common ways for U.S. citizens to hold ownership of foreign real estate. If you are considering purchasing foreign property in another type of foreign trust, through your self-directed IRA or with a single-member LLC, you will need additional professional tax and legal advice. The world is getting smaller, and owning real estate overseas is becoming more commonplace. That doesn’t mean that owning foreign real estate in anything other than your own name is not complex, but with the right advice there’s no reason for it not to be straightforward.