Tax Guide to Overseas Real Estate

Investments

for U.S. Investors- from Durise.com -

Introduction

The rise of real estate crowdfunding platforms, such as Durise, has expanded the potential property investment pool for investors to areas around the world. For U.S.-based real estate investors, the benefits of investing in property overseas are many. From predictable investment returns to standard tax breaks and more, it’s easy to understand the popularity boom.

Before you even begin to consider a jump into the foreign real estate investment pool, it’s important to become as knowledgeable about the entire process as possible. One item that is particularly important to research and understand is the tax implications that go along with property investing overseas. To that end, we’ve put together this tax guide to help U.S. real estate investors gather some much needed tax information.

NOTEOne caveat before we get started - we are neither tax attornies nor tax specialists, so please use this guide within the spirit which it was created - as a helpful resource and guide to help you gain some beginner-level knowledge. Then, once you’re equipped with that knowledge, consult your own attorney and/or accountant for legitimate legal and tax advice.

Your U.S. Tax Implications

U.S. Tax Implications

Investing in real estate via crowdfunding carries with it some tax issues that are unique from more traditional real estate investing. The first thing to understand is that real estate crowdfunding is a form of real estate syndication. As an equity investor in a syndication, you are actually a partner in partnership, and investments in syndications will generally be considered “passive” activities.

“For a real estate entity there are typically two sources of passive activities: (1) rental activities (rentals of apartments, commercial buildings, retail centers, etc.), unless the taxpayer is classified as a real estate professional; or (2) a business (flips, real estate development, etc.) in which the taxpayer does not materially participate. Passive activities will generate either passive income or passive loss. Interest, dividends, annuities and gains on stocks and bonds are not considered passive activities.” [source1]

U.S. Tax Implications cont.

At the end of each year, investors receive a K1 from the syndication. This form will either report income or a loss, as well as other tax items. This information is then included on that year’s tax return following the rules for passive activities. If there is a loss reported on the K1, then the investor reports a passive loss.

There is one additional special tax advantage offered through Crowdfunding syndications.

That advantage is favorable long-term capital gains rates. Property acquired through a syndication is usually held for longer than one year. Then, when that property is sold, it will typically result in long-term capital gains which are taxed at a rate of 15% in most cases. Any depreciation deducted from the property would be subject to tax rates not to exceed 25%.

Your Overseas Tax Implications

Overseas Tax Implications

“For U.S.-based investors, the ownership of foreign property has special tax implications. These are often determined by the laws of the country in which the property lies and the citizenship status of the investor in question. In general, investors who have United States citizenship or permanent-resident status must pay American taxes on any income earned from foreign property holdings. This is true for ongoing rental income as well as for the capital gains realized from the sale of such property.” [source2]

Taxes are frequently levied on income and capital gains earned within a country’s borders by that country’s foreign governments. To help mitigate this “double taxation” problem, the U.S. maintains treaties with several other countries, most of which primarily stipulate that American citizens can’t be required to pay the same taxes twice. In countries that do not have a treaty in place with the U.S., double taxation may still occur, depending on the individual laws of each foreign jurisdiction.

The Foreign Tax CreditThere is an offering within the U.S. Tax Code that allows those that invest in foreign properties to use some (and sometimes all) of the foreign taxes paid to offset liability on your U.S. taxes. According to Investopedia, “for any ‘qualified foreign taxes’ that you’ve paid - and this includes taxes on income, dividends and interest - you can claim either a credit or a deduction (if you itemize) on your tax return.” It is important to realize that there are limits to the amount of foreign tax credit you can receive, so it’s always a good idea to discuss any potential investment opportunity with your tax specialist prior to investing.

“The amount of foreign tax you can claim as a credit is based on how much you’d be taxed on the same proceeds under U.S. tax law, multiplied by a percentage. To figure that out, you’ll have to complete Form 1116 from the Internal Revenue Service (download the form here). If the tax you paid to the foreign government is higher than your U.S. tax liability, then the maximum foreign tax credit you can claim will be the U.S. tax due, which is the lesser amount. If the tax you paid to the foreign government is lower than your tax liability in the U.S., you can claim the entire amount as your Foreign Tax Credit.” [source3]

Foreign Tax Credit cont.

To learn more about the Foreign Tax Credit, visit the IRS website at IRS.gov. There, you’ll be able to find more information on the requirements for claiming foreign tax credits.

https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-compliance-tips

Passive Foreign Investment Companies

One important distinction to be mindful of is investing via a Passive Foreign Investment Company (PFIC). These are foreign-based mutual funds or partnerships that have at least one U.S. shareholder. U.S. tax laws treat these types of investment entities much differently than funds based offshore, and these laws can be very complex.

To illustrate this point, Investopedia shares the following example: “current distributions from a PFIC are generally treated as ordinary income, which is taxed at a higher rate than long-term capital gains.

Tax Information for Dubai Real Estate Investments

Tax Info + Dubai Real Estate Investments

Now we will examine some important distinctions that U.S. based investors should keep in mind when considering property investments within the United Arab Emirates. A focus on Dubai is particularly useful for real estate crowdfunding investments through our platform Durise. “Each emirate [within the UAE has] its own rules regarding foreign investment, and foreign ownership restrictions frequently apply.

For example, Gulf Cooperation Council nationals may invest in Dubai property without

restriction, but not in Abu Dhabi. As a general rule, foreign nationals can only invest in specific areas, wherein freehold land ownership may or may not be permitted for overseas investors.” [source4]

The UAE does not impose income or corporation taxes, so the only taxes a US-based property investor would be liable for are those levied via U.S. tax codes, as discussed above. However, property taxes are one item to keep in mind, although they are not relevant to all property investment scenarios.

Tax Info + Dubai Real Estate Investments cont.

“Property taxes are levied by municipalities. These are the main taxes, if not the only taxes, that you are going to pay in the UAE. The local property tax is generally paid only by landlords who rent out their property. Thus, it is in effect a tax on rental income. In all emirates but Abu Dhabi, the rate is 5% for residential property and 10% for commercial property. In Abu Dhabi, municipal landlord licence fees must be paid by landlords instead. Higher property taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.” [source5]

Glossary of Terms

DefinitionReal Estate Syndication

An effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own.

DefinitionK1

(aka K-1)

A tax document used to report the incomes, losses, and dividends of a partnership. The Schedule K-1 document is prepared for each individual partner and is included with the partner's personal tax return

DefinitionCapital Gains

The profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price

DefinitionDouble Taxation

A situation where a country levies tax on an income that has already been taxed in the same or another country. For example, corporate profits are taxed when they are earned, and then taxed again as personal income when distributed to stockholders (shareholders) as dividend or (in case of an owner-manager) as salary.

DefinitionQualified Foreign Taxes

Generally, the following four tests must be met for any foreign tax to qualify for the credit: 1) The tax must be imposed on you, 2) You must have paid or accrued the tax, 3) The tax must be the legal and actual foreign tax liability, 4) The tax must be an income tax (or a tax in lieu of an income tax).

Definition Form 1116

A form that one files with the IRS in order to claim the foreign tax credit, which is a direct, dollar-for-dollar reduction in one's U.S. tax liability due to taxes levied by a foreign government. Form 1116 is used whether the filer is an individual, a trust, or an estate.

DefinitionPassive Foreign

Investment Company

A foreign-based corporation that has one of the following attributes: 1) At least 75% of the corporation's income is considered "passive", which is based on investments rather than standard operating business, or 2) At least 50% of the company's assets are investments that produce interest, dividends and/or capital gains.

PFICs include foreign-based mutual funds, partnerships and other pooled investment vehicles that have at least one U.S. shareholder. Most investors in PFICs must pay income tax on all distributions and appreciated share values, regardless of whether capital gains tax rates would normally apply.

Sources1) Alphaflow | The Tax Implications of Real Estate Crowdfunding

2) The Law Dictionary | What are the Tax Implications of Foreign Property Ownership?

3) Investopedia | Understanding Taxation of Foreign Investments

4) ExpatBriefing | Property Investment for Expats in the United Arab Emirates

Dubai real estate for the crowd, owned by the crowd

DURISE is a crowdfunding platform that gives accredited investors from all over the world the chance to invest in a range of vetted real estate opportunities in Dubai, on their own terms, and for as low as $1,000. At DURISE, we take on the burden of your transaction, providing tax guidance and management, as well as monitoring tools, so there are no

surprises.