In prior articles we discussed the various benefits of investing in real estate and syndications. It is not surprising then that such benefits when coupled with a more stable, regulated, and transparent US market as well as desire to diversify their investment holdings, investing passively in real estate becomes attractive to foreign investors. Depending on the amount of the investment and job opportunities created as a result thereof, for some it may even open a path to US residency.
However, there are a few important considerations related to tax, legal, compliance, and currency/capital constraints that foreign investors should keep in mind and plan ahead for when investing passively in the US.
1. Consult with your tax advisor how best to invest – as an individual or a business entity and if via a business entity what type (LLC, LP, etc.). Most foreign investors invest via LLCs; however, everyone’s situation is unique and in some jurisdictions (e.g. Canada) investing via an LLC may result in double taxation. Once you determine the type of legal entity, you will need to apply for an Employer Identification Number (EIN) as well as a Taxpayer Identification Number (unless you already have a Social Security Number). Your CPA and attorney can help you with the process.
2. Consult with your tax advisor on whether you need to file a US tax return (federal and state) as a foreign LP and whether any tax withholding or treaty requirements will apply. If investing via a foreign legal entity or as a non-US citizen/resident, be aware that it is not uncommon for the syndicator to withhold a tax. The withholding tax can be as low as 5% (if there is a treaty between the US and one’s country) and as high as 30% (if no treaty; the IRS publishes the latest treaty information on their site). The withholding effectively forces the foreign entity or individual to file a US tax return to “claim” the withholding tax back if the income is ultimately not subject to US tax. Syndicators who do not withhold may be subject to penalty, i.e. as a passive foreign investor do not be surprised if the operator mentions the withholding tax requirements.
3. Hire an attorney who can help with the US legal entity set up, including drafting the entity agreements. Preferably such attorney will be real estate savvy and able to communicate in your native language, so he/she can also help you review the various documents you will be required to execute as an LP.
4. Provide information as requested (to the CPA, attorney, bank, syndicator, etc.) to satisfy US compliance requirements (e.g. OFAC/PEP/BSA/AML/KYC). All physical and business entities are subject to those in the US.
5. Open a US bank acct for the entity you are investing through (yourself or an LLC, for example). Your distributions and the capital gains from the investment will be deposited into that bank account. Such account will likely also be used for transactional fees, e.g. paying CPAs and attorneys, etc. In most cases, you will need to open the account in person. This would be a good opportunity for you to visit the market or asset you care considering investing in and meet the local sponsor team(s). You may be able to invest via a foreign bank account as well. However, there is always a risk that the funds may be held in the correspondent banking system to go through additional compliance and no one has control on how long such funds may be delayed.
6. Find out if you are subject to any capital restrictions (e.g. certain countries have limitations on how much capital can be exported out of the country).
7. Consider currency risk before or after the investment, unless you already have USD savings accumulated ahead of time and plan to keep any gains in USD.
8. Consider regulatory risk – recall many Russian citizens and businesses bank accounts were frozen during the Ukraine/Russia conflict, which left many unable to access offshore liquidity easily.
The above may appear overwhelming, especially for new investors. However, fellow investors or the syndicator you are investing with may have referrals they can help connect you with to get started. In addition, setting up the bank accounts and legal entities as well as passing compliance and any other applicable regulatory approvals typically takes time. As such, you should plan for at least a 6 week lead time period until everything is set up (at least for your first syndication). Despite the additional steps, complexity, and time requirements, real estate investing can be an attractive investment opportunity for many across the globe and the long term benefits can outweigh the upfront one-time set up costs, activities, and time.
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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.