Personal Use of Florida Residential Realty by a Nonresident Alien Shareholder of a Foreign Corporate-related Structure

Non-US citizens who don’t live in the US can use a foreign company to buy property in the US. They or their family can live in the house, but there are tax and legal rules they need to follow. The foreign company can directly own the property, or it can own a US company that owns the property. The tax rules depend on which structure is used. A Florida corporation owned two houses in Florida and Spain. The owner, a person from Peru, and his family used the houses for free. The IRS said the owner should pay tax on the value of the free use of the houses. The court agreed and said the Florida corporation should have taken out taxes from the value of the free use of the houses. In simpler terms, if a domestic company owned property in another country, it might be taxed on the rental income from that property. But if a foreign company owned the property, it would not be taxed on the rental income. This is because foreign companies are only taxed on income they make in the US, not in other countries. So, if the property was in Spain, the rental income would be considered foreign income and not subject to US taxes. This difference in taxation could affect the amount of money the company would owe in taxes. If a foreign corporation owns real estate in the U.S. and earns rental income from it, the corporation may have to prove that it is engaged in a U.S. trade or business to get certain tax benefits. If the corporation can’t prove this, it may have to pay a higher tax rate and lose out on deductions. To avoid this, the corporation can choose to be treated as engaged in a U.S. trade or business by making a special tax election. This will allow the corporation to take deductions for expenses like property taxes, repairs, and depreciation, and pay tax on its net income instead of its gross income. If the corporation doesn’t file its taxes accurately and on time, it could also lose these tax benefits. If a foreign corporation owns property in the U.S., they can avoid certain taxes. However, if the property is located in another country, it’s better for a foreign corporation to own it. This is because owning property through a foreign corporation can help avoid estate taxes in the U.S. There was also a court case where someone tried to get tax deductions for using a part of their home as an office, but they were penalized because they didn’t have a good reason for it. Witnesses testified about the rental value of Florida property and the court accepted their findings. The income reported on tax returns for the property was too low. Taxable income is the starting point for calculating earnings and profits, but adjustments are made to account for tax policy. Certain tax rules apply to foreign business income. William H. Newton III is an expert in international tax and estate planning. This column is written by the Tax Law Section and is meant to help lawyers follow the rules and improve the legal system. It’s important for lawyers to serve the public, make sure justice is being served, and continue to learn about the law.

Source: https://www.floridabar.org/the-florida-bar-journal/personal-use-of-florida-residential-realty-by-a-nonresident-alien-shareholder-of-a-foreign-corporate-related-structure/