 Foreign
ownership of property in a C corp
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 Dear
Tax Talk,
We currently hold a commercial property in a C Corp, and we are
thinking of selling the property. The owner is a foreigner and that
was why he formed a C Corp to buy the property. He has owned it
for more than 10 years and it is the only property and business
in the C Corp. The C Corp does not have any other sources of income.
Does the C Corp pay capital gains tax or income tax on gains? What
will be the tax rate? On top of recapturing depreciation, are there
any other tax considerations?
-- Simon
 Dear
Simon,
It was the norm 10 years ago to buy U.S. real
estate in a conventional corporation since, if structured properly,
the foreigner avoided estate taxes should he have the misfortune
to die while owning the property. While estate-tax exemptions are
being slowly repealed for U.S. citizens and residences, this is
not the case for a foreigner. A foreigner is only exempt on the
first $60,000 in U.S. situs (located in the United States) property.
If a foreign person dies owning a half-million dollar condo in his
name, the estate taxes would be about $150,000.
Of course, if he lived and sold the property personally,
he would only have a 15-percent long-term capital gains tax. The
tax at the corporate level is not quite so cheap and, in some cases,
may cause a heart attack. Corporations, unlike individuals, do not
have a preferential capital gains tax rate. Although the sale of
the property is considered a capital gain, it is taxed at the same
rate as ordinary income of the corporation. These rates depend on
the taxable income of the corporation and are progressive as follows:
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Ordinary income tax rates of corporations |
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But not
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In addition to the federal rates, you have to add
state taxes, depending on in which state the property is located.
If the company uses the cash basis of accounting, it is wise to
pay the state taxes in the year of sale and prior to liquidation
of the company to ensure their deductibility against federal income
tax. Either the company should reinvest all the proceeds in purchasing
a new property (in which case it should consider a like-kind exchange
and avoid current taxation altogether) or it should liquidate in
the year of sale.
The reason that it should liquidate is to avoid
a second level of tax on dividends paid to the foreign shareholder.
An operating dividend to a foreign shareholder by a U.S. corporation
is subject to withholding tax of 30 percent. A distribution in liquidation
is not subject to U.S. tax at the level of the foreign shareholder.
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