 Estate
taxes and foreign ownership of real estate
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 Dear
Tax Talk,
Have the estate tax rules changed with respect to foreigners investing
in real estate in the United States? What would happen if my Argentine
father-in-law died while owning an apartment in Florida valued at
$1 million with an $800,000 mortgage?
-- Mandy
 Dear
Mandy,
I kind of touched on this in a column
that ran last week, but I didn't get into the mortgage question.
Five to 10 years ago it was the norm to buy U.S. real estate in
a conventional corporation since, if structured properly, the foreigner
could avoid estate taxes should he have the misfortune of dying
while owning the property. While estate tax exemptions are being
increased for U.S. citizens and residents, this is not the case
for a foreigner. A foreigner is only exempt on the first $60,000
in U.S. situs property, such as Florida condos, stock in U.S. corporations
and personal property located here.
Meanwhile the disparity between corporate income-tax rates and
the individual long-term capital gains rate has grown, favoring
the purchase of the property individually to obtain the 15-percent
capital gains rate. However, the benefit of the lower individual
capital gains tax rate may be overshadowed by the potential liability
for estate taxes should the nonresident die owning U.S. property.
There's a misconception on how the mortgage affects the value for
U.S. estate tax purposes. Mortgages, claims and expenses of the
estate wherever incurred reduce the U.S. estate based on the relationship
of the decedent's U.S. estate to his worldwide estate.
For example, your father-in-law has the $1 million piece of property
in the U.S. with the $800,000 mortgage. Let's assume he has $9 million
in assets outside the United States, so that 10 percent of his assets
are in the United States. The $800,000 mortgage is combined with
any other claims his estate may have, including, for example, foreign
debts, funeral expenses and administration costs. Let's assume this
is an additional $200,000. Hence 10 percent of the $1 million in
mortgages, claims and expenses goes to reduce the value of the U.S.
estate so that he is taxed on $900,000 in the U.S. and not on the
net of the U.S. property, which is $200,000. The estate tax on $900,000
less the $60,000 exemption is roughly $190,000 in death taxes that
his estate would owe. The tax and the mortgage are almost the value
of the condo. At that point, would it make sense to use other assets
to pay the tax or give it to charity?
While it is tempting to go after the lower individual capital gains
tax rate, the estate tax risk is too concentrated if there is only
one foreign owner. It could be possible to structure ownership to
reduce estate tax risk through the use of a limited liability company
with more than one owner from the family, but that has other implications
as well.
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