After careful consideration, I have recently become Of Counsel with the prestigious South Florida law firm of Dorot & Bensimon PL. Through this of-counsel relationship you will have direct access to the finest legal talent in the area.

With offices in Boca Raton and Aventura, Dorot & Bensimon specializes in domestic and international personal wealth and business planning. The firm advises and implements various tax-efficient techniques in a wide range of important legal disciplines.

Our mutual backgrounds perfectly mesh to provide you with expanded and seamless series that will safeguard your lifestyles and businesses. I have been practicing in South Florida for more than 45 years.

My unique tax practice has helped clients in a wide array of commercial transactions involving complex international transactions in more than 50 countries and domestic situations, many of which have dealt with several millions of dollars of taxes saved.

As a graduate of Georgetown Law School who additionally holds a Master’s degree in tax law from New York University, I have served as a Tax Court Law Clerk, an IRS Senior Attorney, and a partner in one of the largest law firms in the country. During my career, I have cultivated a diverse base of clients both domestically and internationally, covering a wide range of commercial activity.

Located in the Dorot & Bensimon P.L. Domestic & International Tax Law Office
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    By Richard S. Lehman, Esq.

    Presented here is an article describing the U.S. Tax Treaty provisions that permit nonresident aliens to stay longer in the U.S. than is typically allowed and generally limited to at most 182 days. The relevant provision is typical in many U.S. tax treaties. There are several treaties that do not have this provision. The taxpayer must be careful and sure that they are relying on a treaty which provides this benefit.

    There is a little known “GEM” that is found in several United States treaties that can be very important to the foreign business people all over the world who may wish to stay in the United States for extended periods of time (more than 182 days a year), and still not be categorized as U.S. taxpayers for U.S. tax purposes.

    In short, those nonresident alien individuals who have “a closer connection” to their home countries than to the United States will only be taxed on U.S. income they earn in the U.S. and not any of the income made in their home countries.

    The typical modern U.S. Tax Treaty includes what is called the “tiebreaker test.” This “tiebreaker test” is used to determine whether an alien individual is, for United States tax purposes, considered to be a United States taxpayer on income earned in a particular year, or not.

    This “tiebreaker test” is used to determine whether an alien individual is, for United States tax purposes, considered to be a United States taxpayer on income earned in a particular year or continues to be a nonresident alien for tax purposes which means they are not taxed on their worldwide income, even if they have been in the United States for an extraordinary amount of time.

    In that event, a non-United States taxpayer, as a result of a particular article in the income Tax Treaty, may only be responsible for taxes on income earned from United States sources and none of other worldwide income.

    This “tiebreaker test” is used to determine whether, if a nonresident alien remained in the United States for more than One Hundred Eighty Two (182) days in a calendar year, they will still be considered to be only a foreign resident of their home country and only accountable for United States taxes on United States income.

    By the way of practical example, this case is based upon the following facts:

    • At present, the Taxpayer is a Mexican citizen who spends time in Mexico. At all times to date, Mexico has been considered his home and his principal abode.

    • The Taxpayer’s sister resides in the United States and the Taxpayer does spend a considerable amount of time in the United States.

    • The Taxpayer intends to maintain his Mexico residency status at the present time as a result of the fact that his principal business activities are in Mexico that make it necessary that he remain in Mexico, to continue these operations from Mexico. Mexico plays an important part in his business activities. He has no business activities in the United States and a minimum amount of other United States contacts of a personal nature.

    • At all times to date, he has been treated as a non-resident alien individual for United States income tax purposes and not as a resident alien for such purposes. However, from time to time for non-business purposes, he must spend more than six months (the allotted treaty time to remain in the U.S. under a treaty without being considered an American taxpayer). He is allowed to do so under “certain circumstances.”

    The Treaty Residence Rules

    A. Residence Provision. The rules governing an alien individual’s stay in the United States are as follows. Most countries with which the U.S. has a treaty will include Article 4 of the Treaty. Article 4 sets forth rules for determining whether an individual is a resident of the UNITED STATES, and whether the individual’s home country may be used for treaty purposes or not. This determination is crucial because only “residents” of the treaty countries generally may claim the benefits of the treaty.

    The determination of residence for treaty purposes looks first to a person’s liability to tax as a resident under the treaty countries’ respective tax laws.

    For example the Mexican/United States Tax Treaty determines whether an individual is considered to still be principally a Mexican or a United States taxpayer for tax purposes.1/

    The rules governing this matter are set out below.

    Legal Opinion – Mexico Residency

    First, we must first define “residency” for treaty purposes.

    Definition of Resident. Treaty Article 4(1)(a) states in pertinent part as follows:

    “1. For the purposes of this Convention, the term “resident of a Contracting State” means:

    Any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, nationality, place of management, place of incorporation, or any other criterion of a similar nature.

    A resident of Mexico shall be considered to be a resident of the United States only if such person has a substantial presence, permanent home or habitual abode in the United States.

    If such person is also a resident of Mexico such person’s status shall be determined by the “Tie Breaker” rules.

    The “tie breaker” rules are a set of rules that determine under certain circumstances whether a Mexican citizen who has spent more than the allotted 182 days in the United States shall still not be considered a United States person for the purposes of taxation.

    These rules are instituted to insure that those individuals who have indeed closer ties to their home country at certain high levels will not be governed by the laws of the other country but by the laws of their home country.”

    Although a taxpayer could be considered to be a United States resident in the event of a longer stay than One Hundred Eighty Two (182) days in the United States, it does not necessarily also make him a United States resident for tax purposes so long as he is deemed to be a Mexican resident under the Treaty Tiebreaker Test Rule.

    Although the term “citizenship” does not appear among the explicit criteria of residence in the Treaty for these purposes, “nationality” means “citizenship.”

    It is imperative (and we cannot emphasize enough) the fact that in order to support the claim of being a nonresident for purposes of the Treaty, we would strongly urge that the individual (1) obtain a written opinion from tax counsel confirming their tax status in the U.S. and their own country; and (2) continue to file income tax returns each year in their country of origin as an income tax resident without claiming any exemptions or reductions that could potentially affect an associated residence claim under the Treaty.

    Tiebreaker Test Rule

    Treaty Article 4(2) is the Treaty’s “tiebreaker provision”. This will determine whether an individual who has spent more than One Hundred Eighty Two (182) days in the United States in a calendar year is a “tax” resident and is treated as a resident alien under United States tax law or a Mexican individual for income tax purposes of Mexican law.

    In essence, under this provision, the Taxpayer’s particular circumstances are considered as controlling the determination of residence status for Treaty purposes, as analyzed below.

    Where by reason of the provisions of the Treaty, an individual is a resident of both Contracting States (the United States and Mexico), then the proper status shall be determined as follows:

    The important issue is where the Taxpayer has all of his “closest personal and economic relations.”

    If the Taxpayer has a home available in the United States and Mexico, the Treaty must rely on a second standard and test of residency to whether he is a United States resident.

    This is the standard of which country does the Taxpayer have his closest personal and economic relations. His “center of vital interests.”

    Since the issue of having a home is considered a “tie,” it is not of importance because when it comes to a taxpayer’s multiple personal relationships, the Treaty looks to where the taxpayer’s center of vital interest is in all of the other areas of his personal life. Where are his friends, relatives, professionals, family and other factors that determine a taxpayer’s “center of vital interest.”

    There is not a “tie” when it comes to his “center of vital interest.” The “tie” is broken based upon this fact that a taxpayer plays the leading role in Mexican companies and in multiple other undertakings in Mexico and his true home is Mexico.

    In the event that this fact is not sufficient enough to prove the Taxpayer’s bona fides, the next “tie breaker” is if he has a “habitual abode,” meaning some place other than the United States and Mexico that he spends more time.

    There is no need to look to the place of habitual abode if his “center of vital interests,” is in either of the competing countries.

    Since he is a national of Mexico and because his center of vital interest is in Mexico, the competent authorities of the Contracting States should settle the question by “mutual agreement” that he is not principally a United States taxpayer and will be responsible solely for taxes only on United States earnings.

    UNITED STATES Filing Requirements to Claim Treaty Position

    To claim treaty benefits, The Taxpayer will be required to file Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)” together with his IRS Form 1040NR federal income tax return. To claim treaty benefits, Form 8833 must be filed and attached to the Taxpayers UNITED STATES income tax return (if one is required) for each year that he claims certain Treaty benefits such as the Tiebreaker Test Rule. The failure to disclose a treaty-based return position on Form 8833 may result in a $1,000 penalty in the case of individuals.

    It should be noted that there is an issue regarding the specific disclosure requirement on Form 8833, along with the fact that the Treaty has an exchange of information provision (Article 26) whereby the United States could provide to Mexico the information included in any of his United States income tax filings. In this regard, Form 8833 requires that a taxpayer disclose any treaty-based return position, that is, a position that has an impact on the taxpayer’s tax return. It is unclear whether only those return positions that are a direct effect of a treaty-based position must be disclosed, or if all return positions, however indirect, must be disclosed. That being the case, it is unclear whether the Internal Revenue Service will require such disclosures.

    In this case, the Taxpayer will be and is able to claim that he is a resident of Mexico and not the United States under the Tiebreaker Test Rule. He will be avoiding United States income tax on all of his worldwide income, except those items of taxable United States source or business income specifically enumerated by United States tax law as modified by the Treaty.

    REFERENCES:

    1. The United States has over 60 tax treaties with other countries. Some older treaties may not permit a nonresident alien to spend more than 182 days and still be a nonresident alien for tax purposes.

    Mr Lehman represents numerous Americans working and investing outside the United States taking full advantage of another unique set of tax laws. Americans investing and working outside of the United States may benefit from excluding certain income earned outside of the U.S. or deferring the taxation of such income until a later point in time. At the same time there are tax traps for American investors investing internationally that must be avoided.

    Since Mr. Lehman’s early days in the Internal Revenue Service as an estate and trust specialist, he has continued an active estate and trust practice.

    Taxation Both Domestic & International

    Almost one million foreign individuals are relocating to the United States to find a permanent home in America every year. Many of these immigrants owned substantial wealth that they have made during the course of their lifetimes, which have nothing to do with success in the United States.

    Care needs to be taken by these individuals in order to insure that they are not paying taxes on gains and earnings that have accrued before they became U.S. taxpayers.

    There are several techniques to insure that accumulated wealth and income earned prior to becoming a United States taxpayer can be protected from United States taxes.

    Do you know the answers to these basic pre-immigration questions?

    In what investment can a nonresident alien individual investor be subject to paying a U.S.  tax?

    1. Bank deposits
    2. Raw land in the U.S.
    3. Bank deposit in foreign country in which nonresident alien lives
    4. Sale of New York Stock Exchange stocks

    How high can the U.S. estate tax charge?

    1. 0% of the net estate
    2. 15% of the net estate
    3. 30% of the net estate
    4. 40% of the net estate

    The correct answers above are #2 (Raw land in the U.S.) and #4 (40% of the net estate)

    Value can be lost without good professional advice. Contact Richard S. Lehman Today:

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      It is important to understand, once you become a United States tax resident you are subject to income tax on your worldwide income like every other American.

      First of all, we are talking about the Non-Resident Alien. . . . Not a “Resident Alien.”

      What is the amount of time that the non resident alien can remain in the U.S. on an annual basis before achieving U.S. tax status?

      a. 365

      b. 13

      c. 4 total months

      d. 183 DAYS  (the correct answer)

      Schedule a consult with Richard S. Lehman Today:

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        United States Tax Attorney, Richard S. Lehman presents these webinars live. They are all accredited webinars and they are free.  Participants must register in advance of the webinar to receive credit.

        All Upcoming Webinars 2019-2020:

        United States Taxation Topic

        Duration

        Date

        Time

        Pre-Immigration Tax Law for Individuals Immigrating to the U.S

        1.5 hours

        Dec.18, 2019

        10:30 AM – 12:00 PM EST

        United States Taxation of Foreign Real Estate Investors

        1.5 hours

        Jan. 7, 2020

        11:00 AM – 12:30 PM EST

        United StatesTaxation of Foreign Investors in General.

        1.5 hours

        Jan. 21, 2020

        10:30 AM – 12:00 PM EST

        Taxation of Ponzi Clawbacks & Tax Refund from Ponzi

        2 hours

        Jan. 28, 2020

        11:00 AM – 01:00 PM EST

        Pre-Immigration Tax Law for Individuals Immigrating to the U.S

        1.5 hours

        Feb. 4, 2020

        10:30 AM – 12:00 PM EST

        United States Taxation of Foreign Real Estate Investors

        1.5 hours

        Feb.11, 2020

        11:00 AM – 12:30 PM EST

        United StatesTaxation of Foreign Investors in General.

        1.5 hours

        Feb. 18, 2020

        11:00 AM – 12:30 PM EST

        When we talk about foreign investors non-resident alien individuals and foreign corporations both of whom are considered to be foreign investors. They invest in United States real estate and are tax similar to U.S. individuals and U.S. corporations on their U.S. real estate income.

        At the same time they’re also taxed slightly differently and do have advantages to some extent over United States taxpayers. The term foreign individual investors is used for foreign individuals and foreign entities, trusts, partnerships, corporations any way that people can figure on how to get into the United States and invest.

        Foreign investors will be taxed on their ordinary income whether it’s from operating income or as rentals or inventory sales or other income producing transactions from real estate.

        They will like an American individuals be taxed on their capital gains – from the sale of their investments that often are at lower tax rates than ordinary income.

        Foreign corporations are taxed like U.S. corporations. They have the same rate of tax imposed on capital gains and operating income which under the new Trump tax bill is now a 21% tax.

        There is also not just income tax and capital gains tax that foreign investors have to be concerned about. They need to be concerned about the estate and gift tax.

        The United States allows its own citizens to leave millions and millions of dollars without paying a tax on the wealth that they are transferring. The United States does not assert taxes on foreign investors except where there is some relationship with the United States like real estate.  Foreign investors may come to the United States and pay tax only on their real estate and not on any of their other income.

        The problem with foreign investors and the estate and gift tax which is a death tax it’s a tax on the amount of wealth that is being transferred from parent to child. The amount of gifts that are being made. And it applies to transfers on U.S. real estate assets.

        Frequenty Asked Questions

        Taxation of Foreign Investors – General Overview

        1. A nonresident alien individual may become a U.S. taxpayer by becoming a resident due to the “Substantial Presence Test” which requires the nonresident alien to spend more than 182 days in the United States in any single year. This is based upon a 3-year standard that measures the amount of days.

        Correct Answer: True.  A nonresident alien individual may become a U.S. taxpayer by becoming a resident due to the “Substantial Presence Test” which requires the nonresident alien to spend more than 182 days in the United States in any single year.

        2. A nonresident alien may gift shares of stock in a United States corporation that owns U.S. real estate without the nonresident alien individual incurring a United States gift tax.

        Correct Answer: True.  A nonresident alien may gift shares in a U.S. corporation without incurring a gift tax during life.

        3.  A nonresident alien individual who dies owning shares of stock in a U.S. corporation that owns U.S. real estate will not be responsible for a U.S. estate tax on the value of those shares if they exceed the amount of Sixty Thousand Dollars ($60,000).

        Correct Answer:  False.  Shares of stock in a U.S. corporation that directly own U.S. real estate are taxed under the U.S. estate tax rules with only a $60,000 exclusion before taxes must be paid.

        4.  A foreign investor (either a nonresident alien individual or a foreign corporation) may elect to defer taxes or gain in their U.S. real estate investments by choosing to do a “like kind exchange” on their real property for other real property located in the United States.

        Correct Answer:  True.  The foreign individual investor and the foreign corporation, or any foreign entity that owns U.S. real estate will be permitted to take advantage of the Like Kind Exchange that assures there is no taxable gain on U.S. real property exchanged in the transaction.

        5.  A foreign investor that owns 10.5% of a U.S. corporation that owns U.S. real estate may lend money to that corporation and will not be responsible for any taxes on the interest income payable by the U.S. 30% corporate borrower to the Shareholder (lender).

        Correct Answer:  False.


        Frequenty Asked Questions

        Tax Planning Techniques For The Foreign Real Estate Investor

        1. May a Foreign Investor invest in a corporation and avoid paying corporate and individual tax on the gain from the sale of U.S. real estate?

        Correct Answer: Yes, once a corporation, Foreign or U.S., has sold all of its U.S. real estate holding and paid the single tax at the operating level of the corporation, the corporation may liquidate and distribute its assets to its foreign shareholders free of tax.

        Learning Objective 1. To confirm that a foreign real estate investor may invest in U.S. real estate in the corporate form and pay only a single tax.

        2. Can an Investor invest in U.S. real estate and pay no U.S. tax when the U.S. real estate is sold.

        Correct Answer: Yes, there is a unique aspect to the U.S. tax laws when it comes to investing in U.S. real estate. If a foreign corporation invests directly in United States real estate and if the foreign shareholder can sell the shares of his or her foreign corporate stock to a buyer instead of the real estate, the shares of that Foreign Corporation that owns U.S. real estate directly can be sold by the Foreign Investor for no tax whatsoever.

        Learning Objective 2. Confirm that sale of shares by a foreign investor in a foreign corporation is tax free.

        3. Will a foreign investor be permitted to deduct a depreciation allowance (like U.S. taxpayers) from rental income earned from United States real estate investments?

        Correct Answer: Yes

        Learning Objective 3. To confirm that a foreign investor will be entitled to take advantage of a deduction for depreciation from U.S. rental real estate.

        4. Will a foreign individual investor that invests in U.S. real estate be permitted to own a U.S. limited liability company as the investment entity that will own the U.S. real estate?

        Correct Answer: Yes

        Learning Objective 4. To confirm that a foreign investor may own U.S. real estate through a U.S. limited liability company as an acceptable investment entity.

        5. What is the maximum Federal U.S. estate tax rate that can be applied if a foreign investor dies owning a foreign corporation that invests in U.S. real estate and earns less than $10.0 Million in U.S. income?

        Correct Answer: 5. 0%

        Learning Objective 5. To confirm that there is no U.S. estate tax when a foreign investor passes away owning shares in a foreign corporation.


        Glossary

        General Overview of Foreign Investors in the U.S.

        • Nonresident Alien: The tax status of a foreign investor who is subject to the tax rules that govern foreigners and non-Americans
        • Foreign Corporation: A corporation organized outside of the United States
        • Foreign Investor –Passive Income: Income that is usually earned strictly on financial investments that involves no activity by the investors, such as interest, dividends and royalties.
        • Foreign Investor – Active: Income that results from an active trade or business income business by a foreigner in the U.S.
        • Branch Tax: A special tax only on foreign corporations that earn income in the United States
        • Individual Ownership: An entity used by a foreign investor to Investment Entity do business as an individual taxpayer In the U.S.
        • U.S. Corporation: A U.S. corporation that invests in the Investment Entity the U.S.
        • Tiered Corporation: A corporate investment structure that consists of a foreign corporation that owns a 100% interest in a U.S. corporation and the U.S. corporation invests in a U.S. asset
        • Closer Connection: An exception to permit foreign investors Exception to stay in the U.S. for a longer period before becoming U.S. taxpayers
        • Portfolio Loan: A type of loan made by a foreign’ corporation or individual to a U.S.person or entity that results in no U.S. taxation on the interest income paid to the lender
        • Like Kind Exchange: A type of real estate transaction that permits an investor to replace one real estate investment with another and pay no immediate tax on the asset being exchanged

        Glossary

        Foreign Investors in U.S. Real Estate

        • Limited Personal and Asset Liability: Techniques to insure that investors are not sued Personally for investments.
        • Double Taxation: Taxation on two countries “on the same income”
        • Confidentiality: Techniques to insure that foreign Investors’ names are not disclosed as owners of assets
        • Eliminate U.S. estate and gift taxes: The technique that insures nonresidents will not pay any estate or gift taxes in the U.S.
        • Eliminate U.S. Branch Tax: Technique that insures the Branch Tax is not incurred by foreign corporate investors. The branch tax is a tax on foreign corporations with cash earnings that are not reinvested and held in the foreign corporation
        • The Foreign Trust: A trust organized outside of the U.S. that may be used as an Investment vehicle in the U.S.
        • Avoidance of Double Tax: Techniques that can be employed to insure there is only a single tax on real estate earnings. Limited
        • Liability Company: A company that can be formed as a corporation or a partnership where the individual owners are taxed directly if it is treated as a partnership and not a corporation.
        • Entity Choice: An array of investment vehicles carefully chosen to fit the investment for the minimum taxes
        • Tiered corporation: A corporate structure with multiple layers of corporations to fit a tax need
        • Liquidation of Corporation: Elimination of a corporation (often for tax purposes) when a corporation outlives its usefulness
        • Residency for Estate Tax Purposes: Residency for estate tax purposes is a foreign taxpayer who became a U.S. tax resident for estate tax purposes only. This is a result of staying in the United States for a relatively long time and not intending to return to his or her home country

        Value can be lost without good professional advice.

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          Foreign investors are prevalent in the United States in almost every form of investment; buying companies in the United States trading and selling goods in the United States and operating subsidiary businesses. The foreign investors’ tax in the United States is generally similar to the taxation of the American taxpayer, with several unique exceptions that become traps for the unwary foreign investors.

          This presentation will consider many of the traps and techniques for success when foreigners invest in the United States.

          Learning Objectives:

          1. Explore the alternative U.S. tax patterns available to the foreign investor.
          2. Identify the positive and negative aspects of tax planning techniques for the foreign investor.
          3. Discover the legal methods of tax planning for United States income tax purposes.
          4. Recognize the possible needs for planning for United States estate taxes.
          5. Learn about the numerous opportunities in American commerce.

           

          Ask United States Tax Attorney Richard S. Lehman:

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            The interest by foreign investors in United States vacation homes and the purchase of homes for rental to tenants is booming.

            A foreign owner (“nonresident alien”); who wishes to stay in the United States for extended lengths of time needs to be careful to make sure they are not considered to be U.S. taxpayers that would cause them to pay tax on their worldwide income. We will explore how a nonresident alien could become a U.S. taxpayer. This generally is a result of a nonresident alien spending too much time physically in the U.S.1

            Non-Resident Alien Individuals – Taxation

            A non-resident alien is a non-U.S. citizen and NOT a resident alien.2

            Rental Income and Sales Income

            Vacation homes may be bought and sold and rented at any time and the profit from these homes will be taxed at 10% to 20%, depending upon the amount of profits earned from a sale in excess of the cost of the real estate asset. This is the case when the foreign investor owns the home as an individual directly or through a limited liability company (“LLC”).

            In the event a Taxpayer becomes a “green card” holder, this is known as a permanent resident. The alien individual will become a U.S. taxpayer at the time they receive the green card. They will be taxed like U.S. citizens even though they are not citizens of the U.S. However, they do have the right to freely exit and enter the United States as they wish, the same as U.S. citizens.

            The alternative to an individual’s acquisition is for the nonresident individual to own the real estate in a U.S. corporation or foreign corporation, which is taxed at 21% on income from rents or sales.

            Regardless of the form, there should be only one U.S. income tax on rental income and one tax on a final sale of real estate if it is accomplished with proper planning.

            Rental Income

            Profits are determined by the amount of rental income collected, reduced by all of the expenses incurred as a result of ownership of the real estate and “depreciation deductions” claimed during the ownership of the rented property. “Depreciation” is an additional benefit reducing the taxes on rental income under the assumption that real property (the buildings only), not the land, is deteriorating every year and losing value. This loss of value through deterioration is often a myth since the general rule is that real estate appreciates over time. However, for tax purposes, it is assumed that this allows each real property owner to account for the possibility that the real estate is a wasting asset by deducting a certain amount each year to account for the “depreciation” that allows the owner to recoup for his cost of the asset.

            Homes and other real estate assets may be rented to third parties for rental income or lived in by the owner or sold. Rental income benefits from certain tax deductions that reduce the taxable income. All expenses of renting to a third party will reduce taxable rental income.

            Sale of Real Estate

            When the real estate is sold, if it has not actually depreciated the “depreciation deductions”, will have reduced the value of the property for tax purposes. This depreciation will be treated as a gain since the taxpayer has benefitted from deducting his or her cost of the assets over the years.

            Investors may sell their U.S. real estate at any time. The gains from the sale of real estate are subject to tax at times at lower rates of tax, depending upon the amount of profits earned from the sale.

            Taxes on the profits of sale result if the property has been sold at a profit over its cost as reduced by depreciation if the property has been rented.

            Taxation Pattern

            Nonresident aliens who earn real estate income will be taxed on that income in the United States. U.S. Residents (“Tax Resident”) are subject to U.S. Taxation. Foreign investors who do wish to enjoy expanded stays in the U.S. may become U.S. taxpayers. If this is the case, they will be subject to the following U.S. taxes.3

            1. Income Taxation – Tax residents are taxed on their worldwide income.
            2. Estate Taxation – There is a net wealth tax at death based on worldwide assets of U.S. citizens and tax residents.
            3. Gift Taxation – Gifts given by U.S. taxpayers are taxed.Furthermore, gifts of real estate made by U.S. alien nonresident individuals are taxed.The gift tax and estate taxes can be avoided completely by nonresident aliens with the proper tax planning.However, U.S. Taxpayers do not incur the estate taxes or gift taxes unless there are assets transferred in these manners exceed the amount of $11,000,000. This amount is increased every year for inflation.

            Alien Individual Non Resident Investors are only subject to U.S. Taxation under the following circumstances:

            Nonresident individuals are typically only taxed on their U.S. situs assets such as real estate.

            1. Income Taxation. Income tax is paid only on United States source income, and limited types of income from non-U.S. sources. Rental income and sales income are from U.S. sources if it is earned from U.S. real property.

            2. Estate Tax. A Foreigner will pay a (“death tax”), if he or she dies owning U.S. real estate directly. The Estate Tax is imposed on United States Situs assets only. This includes U.S. real estate, stocks and bonds and certain tangible assets. These taxes should be avoided at all costs because it is very expensive. While American taxpayers do not pay these taxes unless the amount of assets are greater than $11,000,000 when they die, that is not the same for nonresidents who can exclude only $60,000 of real estate wealth before paying an estate tax at death.

            The estate and gift tax exclusion for nonresident aliens before paying U.S. estate and gift taxes is only on the first $60,000. If a nonresident alien dies owning U.S. real estate worth $1,000,000, they must pay an estate tax (as high as 40%) on $940,000.

            3. Gift Tax. During life there may be a gift tax imposed on foreigners who make a gift of real and tangible personal property within the United States. (Except there is no gift tax on gifts during life on shares of corporate stock).

            A foreign investor in the U.S. needs to plan how to avoid the estate tax on large acquisitions of real estate.

            This can be accomplished through several tax planning vehicles. We will discuss these in this article.

            Tax Residency Status

            “Residency Status” for Tax Purposes differs from the “Residency Status” for immigration purposes. For income tax purposes a resident alien is a person who lives in the United States for a certain period of time during a year. A “Resident” for income tax purposes is measured by the time spent in the U.S.

            A resident for estate tax purposes is an alien individual who has made the United States their permanent home.

            Resident for U.S. Income Tax Purposes

            U.S. residency for income tax purposes is determined by the amount of time a nonresident individual stays in the U.S. for each calendar year.

            A nonresident alien can become a U.S. taxpayer by spending too much time in the U.S. under a standard that measures the amount of days the nonresident is in the U.S. over a three-year period of time. This is known as the Substantial Presence Test.

            The Substantial presence test measures an alien’s presence in the U.S. over a three-year period. In the second year, prior to the year that is being considered, the days in the U.S. are counted and each day is considered as 1/6th of a day. In the first year prior to the current year each day is measured as 1/3rd of a day. In the actual year being considered, each day counts for one day.

            If based on this formula, the alien has spent an amount of time equal to more than 182 days in the year being considered for residency, then the nonresident alien taxpayer is considered to be taxable like an American (worldwide income) for that year.

            Exceptions to a Finding of Tax Residency

            There are three exceptions to the above rules that expand the time frame that a nonresident alien may stay in the U.S. without being a tax resident.

            TAX TREATY

            The U.S. has tax treaties with over 60 countries. Under those tax treaties there are certain circumstances that allow the resident alien to be in the U.S. for more than 182 full days in a year and not be considered a resident for tax purposes.

            THE CLOSER CONNECTION EXCEPTION

            A nonresident alien who has much closer ties to their home country may be able to stay in the U.S. for 182 full days a year and still not be a U.S. taxpayer if they can prove that during that time they still had more permanent ties to their country of origin.

            STUDENTS

            A foreign student who has obtained the proper immigration status will be exempt from being treated as a U.S. resident for U.S. tax purposes even if he or she is here for a substantial time period that would ordinarily result in the student being taxed as a U.S. resident under any other circumstances.

            This student visa not only permits the student to study in the United States, they will only pay taxes only on income from U.S. sources and not on the student’s worldwide income.

            The visa also permits the student’s direct relatives to accompany the student to the United States and receive the same tax benefits.

            Tax Planning for Real Estate Investment by Nonresident Aliens

            The non-resident alien investor can reduce or eliminate many of the U.S. tax consequences of real estate ownership through a number of tax planning devices.

            Estate and Gift Tax

            A nonresident alien investor in real estate will be exposed to the U.S. estate tax and gift tax if they own U.S. property in their individual names or a limited liability company (a partnership) is established to own the real estate.

            However, in the event a foreign investor owns a foreign corporation formed outside of the United States, the foreign investor will only own the shares of the foreign corporation. The investor will not own the real estate directly and personally. This is not direct ownership of real estate by an investor and will not result in the foreign investor paying any gift taxes if the investor only transfers shares of the foreign corporation that owns the real estate as a gift or if the foreign investor dies owning shares of a foreign corporation that owns U.S. real estate.4

            Income Tax

            There is no avoiding the U.S. income tax on gains or income from US. real estate. However, because of the depreciation deduction reviewed earlier, rental income is reduced for that deduction and the taxes on rental income are lower even though there is no actual economic loss from the depreciation. Depreciation does reduce rental income at no cost to the owner.

            When the asset is sold, there is a tax on the profit or “gain” earned.

            # # #

            Footnotes:

            1. We will explore how a non-resident alien unknowingly can become a U.S. tax resident for tax purposes.
            2. Green Card Holders
            3. In the latter part of this Article, we will describe how nonresident aliens can avoid becoming U.S. residents. Essentially this is accomplished by the nonresident not extending their stay in the U.S. past certain time limits.
            4. A foreign investor may also use a U.S. corporation to own real estate and avoid the gift tax since there is no U.S. gift tax on a transfer of shares in a U.S. corporation. However, there is an estate tax imposed if a nonresident alien dies owning shares in a U.S. corporation.

            Contact Barrister Richard S. Lehman, United States Tax Attorney

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              WATCH THIS ONE-HOUR EDUCATIONAL VIDEO: Pre immigration tax planning – taking advantage of lower rates in u.s. income taxes and avoiding taxation on accrued wealth. Presented by Richard S. Lehman, U.S Tax Attorney

              Watch on YouTube

              The United States under the new Trump Tax Bill has to some extent become a tax haven for the wealthy immigrating individuals.

              More and more wealthy immigrants from strife torn or corrupt countries, can come to America and do business in America, under a tax regime that taxes profits and capital at lower rates, (the “Trump Taxes”).

              Foreign investors from throughout the world are coming to the United States for increasing growth and opportunity for prosperity. Many of them are already wealthy.1

              Immigration – U.S.A. Tax

              It is very important that wealthy immigrants to the U.S. understand the tax laws regarding

              (1) profits in the United States,

              (2) the tax laws that govern gifts of U.S. assets made by foreign taxpayers, and

              (3) transfers of US assets by nonresident aliens who die owning certain types of wealth in the United States.

              The United States now has several categories of individual income tax payers that may make large amounts of income and grow their wealth significantly; sometimes at a 20% tax rate, depending on the type of income they earn in the U.S. tax system.2

              The maximum tax on corporations, both foreign and domestic is 21% on profits.

              Wealthy foreigners who are immigrating to the U.S. and planning on a permanent move to the U.S. need to make sure that all of their accrued wealth earned over the years should not be subject to U.S. income tax and/or a tax on capital gains, because these income and gains were accrued, when the taxpayer was not a U.S. person.

              However, without the proper tax planning [in advance] of becoming a U.S. resident for tax purposes could be very costly in the form of the payment of U.S. taxes on accumulated wealth.

              Avoiding U.S. Income and Capital Gains Taxes on Accumulated Wealth

              It is extremely important that wealthy individuals who are seeking a degree of permanency in the U.S. tax should recognize that all of their economic gains and income that accrued before they became US taxpayers do not need to be subject to U.S. income taxes or gift taxes or death taxes [if they plan in advance] before obtaining their tax residency status.

              Nonresident alien individuals who plan on a permanent move to the U.S. do not have to risk paying US taxes on sales of assets or payments of income that have been earned over all the years before they became a U.S. taxpayer if they take the right steps to protect their accrued income and gains in advance of U.S. tax residency.

              In addition to planning to make sure that their accrued income and gains are not taxed; tax planning for the US immigrant must be planned in advance for the potential death of these wealthy individuals, who immigrate to the United States.

              Footnotes:

              1. Immigrant U.S. taxpayers need professional guidance in order not to pay taxes unnecessarily. This advice is provided by an international tax attorney well versed in U.S. tax and international law.
              2. The highest tax rate in the U.S. now is 37% on individual incomes in excess of $250,000 and $600,000 for married couples.
              3. There is no “immigration tax” or entry tax upon becoming a U.S. taxpayer.

              Value can be lost without good professional advice.

              Contact U.S. Tax Barrister, Richard S. Lehman Today:

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