Using Shared Appreciation Mortgages to Avoid FIRPTA

Foreign investors are putting a lot of money into U.S. real estate because the U.S. dollar is weak and interest rates are low. The main issue for foreign investors is a law called FIRPTA, which makes them pay U.S. taxes when they sell U.S. property. One way to avoid this is by using a shared appreciation mortgage (SAM), where the lender gets a share of the profit when the property is sold. This can be a good strategy for foreign investors because it can help them avoid paying U.S. taxes on their investment gains. A USRPI is a US real property interest, like owning land or shares in a US real property holding corporation. It also includes loans that give you a share in the profits from US real estate. So, if you have a stake in US real estate, it’s considered a USRPI. If you’re a non-U.S. taxpayer and you own property in the U.S., you may have to pay taxes when you sell it or make certain other changes to it. This could include things like selling the property, giving it as a gift, or even going through a foreclosure. However, there are some special rules that could help you save money on taxes, like if you lend money to someone in the U.S. to buy property and then get a share of the profits when they pay you back. A foreign lender can invest in U.S. real estate through shared appreciation mortgages to avoid paying taxes on the gain from selling the property. This is because the payments from the mortgage are considered interest for tax purposes, and are not subject to U.S. federal income tax. This can be done by structuring the investment correctly and taking advantage of certain tax rules. It’s a way for non-U.S. taxpayers to invest in U.S. real estate and save on taxes. Some payments on certain types of loans from the US to people in certain other countries aren’t subject to a US tax like they usually would be. This is because those countries have agreements with the US to eliminate the tax on these payments. However, the person receiving the payment has to be a resident of that country and meet certain other requirements.
If a non-U.S. taxpayer wants to invest in U.S. real estate without paying a lot of taxes, they can set up a company in Hungary or Norway and then lend money to a U.S. company. This way, they can avoid paying a lot of taxes and bring their profits back to their home country without losing too much money. A person from the U.K. wants to invest in a U.S. real estate project. They set up a company in Norway to do this. By doing things this way, they can avoid paying certain taxes in the U.S. and Norway. This setup also allows them to transfer their earnings back to the U.K. without being taxed as much. The U.S. could try to challenge this setup, but there are arguments to defend it. The IRS might argue that the relationship between the foreign lender and the U.S. borrower is like a partnership for tax purposes, which would mean the contingent interest payment is not considered interest for U.S. tax purposes. However, there are rules and examples that support the contingent interest payment as being considered interest for tax purposes and do not treat the lender and borrower as partners for tax purposes. So, it’s a bit of a debate. A court case called Farley said that a special type of loan for foreigners investing in U.S. property should be treated as interest for tax purposes. But the IRS might still try to deny treaty benefits if the loan goes through multiple foreign companies. In another case, the IRS said that a company acting as a middleman for interest payments couldn’t get treaty benefits. The IRS also has rules to ignore middlemen in certain financing arrangements, like back-to-back loans. So, the IRS could ignore a middleman company in a loan setup if the rules are met. In simpler terms, when a company from Norway gets a loan from the U.S., there could be some tax issues. The IRS may argue that the Norwegian company should not get tax benefits because the loan is being paid to a branch of the company in the U.S. But it would be more difficult for the IRS to argue this if the loan is actually being paid to a separate entity in a different country. Overall, there could be some complications when companies from different countries are involved in loans and taxes. With more and more foreign investors buying real estate in the U.S., it’s important for them to minimize the taxes they have to pay. Shared Appreciation Mortgages (SAMs) can help with this, as long as they are structured correctly. This means including specific terms in the loan agreement, like a definite maturity date and a cap on interest participation. It’s also important to have enough security for the loan and to make sure it’s recourse in nature. If these conditions are met, foreign investors can save a lot of money on taxes when investing in U.S. real estate. This article is written by a lawyer from a firm in Ft. Lauderdale.

Source: https://www.floridabar.org/the-florida-bar-journal/using-shared-appreciation-mortgages-to-avoid-firpta/