Tag Archive for: Real Estate

Privacy Flag Offshore

Top two max privacy options to plant your flag offshore

The last few months have seen a striking increase in demand for offshore residencies and investments. Americans are looking to diversify out of the dollar, move their assets abroad, and to plant as many foreign flags as possible before the year end. Here are the top two max privacy options for 2018.

Because of the political climate in our country, Americans are renouncing US citizenship at record rates. In the third quarter of this year, 1,376 Americans renounced their US citizenship, putting the annual tally on pace to beat 2016’s record. That’s a 26 percent increase from 2016’s total of 5,411 – which was itself a 26 percent jump from 2015.

Those who are planning on burning their blue passports, want to diversify and create a safety net abroad, or wish to build an escape route and landing spot should things go badly, need to plant as many flags offshore as possible. The hottest offshore plans this quarter are:

  1. A second residency in a low or no tax country that leads to citizenship and a second passport, and
  2. Belize is suddenly the most active real estate market for those seeking personal freedom. This is a very new development and can be summed up in one word – Bitcoin!

Here’s where to get a second passport or second residency and why Belize has become the hottest offshore real estate market out there.

Second Residency Programs

There are two ways to acquire a second passport: you can buy it or you can earn it over time. You can buy a passport from a country like St. Lucia for $125,000 (single applicant) to $300,000 (family). St. Lucia is the lowest cost quality passport for purchase.

If you want a top tier passport, or don’t have an extra $250,000 lying about, you can earn a second passport through residency. Get a residency visa, maintain that visa for 5 or 6 years, and you can apply for citizenship.

The best top tier residency program Portugal. This country’s golden visa program get’s you EU residency, which means you can live and work anywhere in the Union during your residency. You can apply for citizenship and a passport after 6 years of residency.

You can get residency in Portugal by depositing money in a local bank or with the purchase of real estate. The most popular option is to deposit € 1,000,000 into a bank in Portugal (you don’t need to spend or invest it, just hold it in the bank). You can also buy any property for at least € 500,000 and get residency. If you buy a property that’s 30+ years old or located in an “urban renovation” area you need only spend € 350,000.

The best low cost residency program is Panama. If you’re from a “friendly nation,” you can get residency in Panama with an investment of just $20,000. You can then apply for citizenship and a second passport after 5 years of residency.

The investment must be made into one of Panama’s approved reforestation programs and covers the entire family. That is, only one investment is required for a husband, wife, and dependent children 18 years and under. Legal and government fees apply per person.

If you’re not from a friendly nation, the best residency program with a path to citizenship is Nicaragua. Anyone can apply, no matter your country of citizenship and the investment is only $35,000. Legal and government fees are higher than Panama, about $10,000 per person.

The big difference between Panama and Nicaragua is that you must spend 180 days a year in Nicaragua to keep up your residency. Panama does not have a physical presence requirement.

Real Estate in Belize

The Belize real estate market has been on fire for the last 2 months. Belize developers are now allowing buyers to pay 100% of the purchase price and all fees in cryptocurrency. For those looking to get their coins out of the US and away from the IRS, real estate in Belize provides an excellent opportunity to trade Bitcoin and diversify out of cryptocurrency.

Most of the buyers in Belize have been early adopters of Bitcoin. Those with significant gains and a desire to diversify out of cryptocurrency. Belize provides the best, and often the only, way for these investors to exchange coins for property.

The reason Belize and crypto have gone so well together is that Bitcoin’s original business model of privacy and security is what Belize has been about from day 1. Belize is one of the last tax havens standing where personal privacy is a natural right.

As Bitcoin grew, government’s perverted the original intent, but early adopters can still find a libertarian and (nearly) tax free existence in Belize. This country doesn’t tax capital gains and won’t ask you to report your holdings or your transactions.


For the above reasons, the top two max privacy options to plant your flag offshore is a second residency in a low or no tax country and buying real estate in Belize with your appreciated cryptocurrency. Both have seen major increases in demand this quarter and I expect them to do even better in 2018.

If you would like more information on second residencies, second passports, or real estate in Belize, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you to diversify offshore. 

International Real Estate

Where to buy international real estate

This article on where to buy international real estate isn’t going to be a list of countries with the highest returns. And it’s not a pitch trying to sell you the development that pays us the highest commission. Instead, this post on how to buy international real estate is how to narrow down your potential markets and maximize returns.

Finding the right country and right property in an up and coming neighborhood is a very personal endeavor. By following these recommendations on where to buy international real estate, you might increase your return on investment by 20% to 30%. That is, by beginning the search in with a solid strategy, your ROI on international real estate investments may increase significantly.

Here’s how to increase your ROI on international real estate investments by selecting the right country:

Remember that US citizens are taxed on our worldwide capital gains. No matter where you invest, the US government will want it’s cut of your profits. Even if you live abroad, you still pay US tax on your capital gains. Assuming Trump does away with the Obamacare tax, your long term Federal capital gains rate will be 20%.

That is to say, you will pay at least 20% in capital gains tax when you sell your international real estate investment property. It doesn’t matter that this investment is outside of the US, you still pay long term cap gains tax.

What about foreign taxes paid, you ask? You get a dollar for dollar tax credit on your US return for any capital gains tax paid in the country where the property is located. So, if you pay 15% in capital gains tax to Brazil, this leaves only 5% for Uncle Sam.

Another way to say this is, so long as the country where you buy international real estate has a capital gains rate equal to or lower than the United States, you will not pay more than 20% in tax on the sale. Your country of investment gets first crack, and the IRS takes what’s left, up to 20%.

Therefore, the best way to increase your ROI, all things being equal, is to buy international real estate in a country with a capital gains rate of 20% or less. If you buy in Austria, with a rate of 27%, the property must appreciate 7% more than one in Brazil to end up with the same amount of money in your pocket after the sale.

The list of countries with capital gains rates of 20% or less is quite significant. See: Capital Gains Tax by Country. But that’s just the beginning of this strategy. Here’s how to pay zero capital gains tax on your international real estate investments, thereby increasing your ROI by 20% or more.

There are two ways to pay zero capital gains tax to the US on your international real estate investments:

  1. Buy foreign real estate in your IRA or defined benefit plan, or
  2. Buy international real estate inside a US complaint offshore life insurance policy.

You can take your IRA offshore by transferring the account into an offshore IRA LLC. Once your retirement savings is out of the United States, you can use it to invest in international real estate or just about any other asset you wish. For more on how to by foreign real estate in an IRA, see: Here’s how to take your IRA offshore in 6 steps.

Foreign real estate purchased inside of a traditional IRA will be tax deferred and international real estate inside of a ROTH IRA will be tax free. Because you don’t pay US capital gains tax on the sale, you want to invest in countries with low or zero capital gains rates.

That is to say, when buying international real estate with your offshore IRA LLC, focus on countries with low capital gains rates because your US rate is zero.

If you buy real estate in Brazil through an IRA, you pay 15% to Brazil and zero to the IRS. If you purchase real estate in Barbados or Belize, you pay zero capital gains tax to these countries and zero to the IRS. This is because Barbados and Belize, along with several other countries, don’t tax capital gains.

Therefore, when making the investment through an IRA, a property in Brazil must generate a 15% higher return than one from Belize or Barbados to net out to the same after tax profit.

Note: Be careful when buying international real estate in countries that don’t have capital gains taxes. These nations sometimes have high stamp duties, transfer taxes or property taxes. These taxes aren’t deductible using the US Foreign Tax Credit against your US capital gains tax. If the choice is a 10% transfer tax or 10% capital gains rate, you prefer the capital gains tax because it’s deductible dollar for dollar on your US return. With a transfer tax, you pay 10% to the local government and 20% to the IRS.

The other method for eliminating US capital gains taxes on international real estate purchases is to buy through an offshore life insurance policy. Setup a US compliant policy, usually with an investment of at least $2.5 million, and you have the equivalent of a large IRA without the investment caps or distribution requirements.  

If you hold foreign real estate inside a life policy until you pass, that property transfers to your heirs with a step-up in basis. They pay zero tax if sold immediately, or only pay tax on appreciation that accrues after your death. In essence, an international life policy held until your death operates as a ROTH IRA.

If you terminate the policy while you’re alive, you had tax deferral while the policy was in place. An offshore life insurance policy in this case functiones like a traditional IRA.

I’ll close with this: President Trump is talking about reducing the US capital gains rate to 10%. If you believe this is likely, then you want to purchase foreign real estate in countries that have tax rates of 10% or less. If the US cuts its rate to 10%, and you buy in Brazil, you’re overpaying by 5%.

I hope this information on where to buy international real estate has been helpful. For more information on taking your IRA offshore, setting up a US compliant life insurance policy, or to be connected to an international real estate agent, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

international real estate in 2017

Where to buy international real estate in 2017

President Trump has promised to rewrite the US tax code as it applies to international business and foreign investment. He has also promised to lower both the capital gains rate and the personal income tax rate. With that in mind, this article will help you figure out where to buy international real estate in 2017.

You might be thinking, what the heck does any of this have to do with where I should buy international real estate. Well, the tips I’ll give you below can increase your returns by as much as 20%. Coordinating US tax policy with your foreign investment portfolio can make a very big difference.

We Americans are taxed on our worldwide income no matter where it’s earned. If we pay tax in a foreign country, we get a foreign tax credit from Uncle Sam to avoid double taxation. However, we will always pay at least the US rate.

The US rate for long term capital gains is currently 20%. It might go down to 10% or 15% under Trump. This is the minimum tax we will pay on gains from foreign investments.

For example, you buy a property in Colombia for $100,000 and sell it for $200,000 after 5 years. Your gain is $100,000. Colombia’s capital gains tax rate is 10%, so you will pay this to the local government. This leaves 10% available for the IRS.

So, even when you invest in a country with a 10% rate, you will pay a total of 20% because you’re a US citizen in 2017. Hopefully this will go down in 2018.

If the US rate goes to 10%, you will pay the same 10% to Colombia and nothing to the United States. Likewise, if the US rate goes to 15%, you will pay 10% to Colombia and 5% to Uncle Sam.

So, the key to tax efficiency in international real estate investing is to purchase in a country with a tax rate equal to or lower than the United States. You’ll always pay the US rate, but you never want to pay more than this.

With Trump looking to cut the US capital gains rate, international real estate investors need to rethink their strategies. Focus on countries with low tax rates to maximize your after tax ROI.

The same goes for local taxation of rental income. You’ll always pay the US ordinary income tax rate on rental profits. You don’t want significant rental income in a country with a rate significantly higher than the United States.

This isn’t always so easy to figure out. If you’re at the top of the US income brackets, just about every country will have a rate equal to or lower than your US effective tax rate. If you don’t have much ordinary income, then you want to watch your foreign tax rate carefully.

For example, Colombia taxes rental income at 33%. Also, they don’t allow you to deduct depreciation. So, Colombia’s tax rate on rental income can be much higher than your US rate, depending on your situation.

Someone focused on capital gains might like Colombia while someone focused on cash flow should look elsewhere.

This all goes double for US investors buying international real estate in 2017 using their retirement accounts. When you buy foreign real estate in your US IRA, you pay zero tax if it’s a ROTH and get significant tax deferral if a traditional account.

Thus, any foreign taxes paid are a waste of money because there’s no offsetting foreign tax credit and no minimum tax floor set by the US capital gains rate. IRA investors should focus on countries like Belize with zero capital gains tax or Nicaragua with a 10% rate.

Coordinating your US tax bill with the tax rate of the country where you purchase real estate can significantly increase your net return. If Trump’s tax cuts come through, those who have invested in low tax countries will be rewarded.

I hope you’ve found this article on where to buy international real estate in 2017 to be helpful. For more information, or to take your IRA offshore, please contact us at info@premieroffshore..com or call us at (619) 483-1708.

retained earnings

Watch Where You Invest Those Retained Earnings – IRS Tracking Luxury Home Purchases from Offshore Companies

According to the N.Y. Times, The IRS has begun tracking homes bought through offshore companies and shell corporations in the United States. If you’ve setup an offshore structure, and used your retained earnings to buy real estate in the United States, you’re probably a target of the IRS.

Even if your offshore company is tax compliant, you still may be in trouble with the tax man for using those retained earnings for your personal benefit. You may be living in the property at below market rent or taking the rents as personal income.

If you’ve managed to avoid the worst of the pitfalls, investing retained earnings in the United States might have converted them to taxable distributions to the parent company. For more information, see: How to Manage Retained Earnings in an Offshore Corporation

The bottom line is that offshore retained earnings are best held offshore. Unless you have a tax plan and written opinion from a reputable firm, leave the money alone and allow it to build up inside your operating company.

And now, here’s the rest of the story:

As I said above, the IRS is targeting luxury home sales involving offshore companies. Because buying US real estate is a common, if risky, use of retained earnings, this investigation is likely to net many offshore entrepreneurs.

The first stage of this investigation is now complete. It was focused on Miami and Manhattan, where over 25% of the all-cash luxury home purchases made using offshore companies or shell corporations were flagged as suspicious.

Today, officials said they would expand the program to areas across the country. The IRS will target luxury real estate purchases made with cash in all five boroughs of New York City, counties north of Miami, Los Angeles County, San Diego County, the three counties around San Francisco, and the county that includes San Antonio.

The IRS says that the examination, known as a geographic targeting order, is part of a broad effort by the federal government to crack down on “money laundering and secretive offshore companies.” As we know, “money laundering” is basically code for “tax cheats.” For every one drug kingpin caught in their net, they’ll land 1,000 tax cases.

Cases will be selected based on the purchase price of the property. Only all cash sales will be targeted in this round of audits. The dollar values involved are as follows:

  • $500,000 in and around San Antonio;
  • $1 million in Florida;
  • $2 million in California;
  • $3 million in Manhattan; and
  • $1.5 million in the other boroughs of New York City.

You might be thinking, that the IRS doesn’t have data on every real estate purchase in the United States. How the heck are they going to audit every single transaction over these amounts.

Never fear, the IRS thought of that. All they needed to do is issue an order to every title insurance company in the United States. Basically, they’ve drafted title insurance agents into the IRS army (unpaid, of course), to search through their records and select those who should be investigated.

  • Title insurance companies are involved in just about every residential and commercial real estate transaction in the United States.

And these insurance agents aren’t just providing information on the home in question. They’re identifying the escrow agent, the US and offshore banks involved, all paperwork from the offshore company, etc.

Once the IRS has the bank account information, they’ll summon your account records. This will enable them to chase down all inbound and outbound wires.

Here’s the bottom line: investing retained earnings into the United States opens up a pandora’s box of trouble. I’ve been telling clients this for years and now it’s come to fruition.

If you have an active business offshore, keep your retained earnings offshore. Don’t make you and your cash a target for the IRS. Even if you’re 120% tax compliant, avoid the audit, avoid the battle, and protect your hard work from the Service.

I hope you’ve found this article on the IRS’s targeting of offshore retained earnings to be helpful. If you have questions on structuring a business offshore, you can reach me at info@premieroffshore.com for a confidential consultation.

Offshore 1031 Exchange

The Offshore 1031 Exchange – Pay Zero US Tax on Your Foreign Real Estate Sale

Are you planning to sell your offshore rental or business property? Are you thinking about buying a similar property abroad (anywhere other than in the United States)? Then you need to understand the offshore 1031 exchange for foreign real estate transactions.

Here are the basics of the offshore real estate tax:

If you are a US citizen and sell an offshore property, you will probably owe the US IRS. It doesn’t matter that you have not lived in America for years or that the money never touches the US. You will often owe Uncle Sam a big piece of the pie.

We Americans are taxed on our worldwide income no matter where we live. We expats can use the Foreign Earned Income Exclusion to reduce or eliminate US tax on a salary or income from an active business. But the FEIE does not apply to passive investments or capital gains from real estate.

The only savings available for capital gains is the Foreign Tax Credit. You get a dollar for dollar credit with the IRS for any taxes paid to the country where the property is located.

If the capital gains rate in your country is equal to or higher than the top US rate of about 23.8% for long term gains (including the 3.8% Obamacare tax) and 38.6% for shot term (max ordinary rate), you will probably not pay taxes on the transaction to the IRS. You still need to report the sale on Schedule D and take the Foreign Tax credit, but you shouldn’t owe any tax.

— for the rest of this post, I will focus on short term capital gains from real estate.

Because the US has one of the highest capital gains tax rates, most clients get a nasty surprise on their US return when they sell an offshore real estate property. They get to pay both the local tax rate and then 10% or so to the IRS.

Of the OECD countries, only Denmark (42%), France (34.4%), Finland (33%), Ireland (33%), and Sweden (30%) have higher rates. The average capital gain rate in OECD countries is 18.4%. What’s more, nine OECD countries do not tax capital gains at all.

Here’s an example of selling a property in a country with a low capital gains rate:

Let’s say you bought a property in Colombia 5 years ago and will now sell it at a gain of $100,000. You’ll pay Colombian capital gains tax at 10%. You will then receive a credit for foreign taxes paid to Colombia of $10,000 on your US return. Because the US rate is 13.8% higher than the Colombian rate, you’ll also pay $13,800 to the IRS for the right to carry a US passport.

For more detail on US taxation of foreign real estate transactions, please read: Taxation of Foreign Real Estate Investments.  

The Offshore 1031 Exchange

Here’s how you can use the offshore 1031 exchange to pay zero US tax on your foreign real estate transaction. There are many rules to follow, but we take care of most of the compliance and documentation items for you.

Here’s what you must do to ensure that the transaction qualifies as an offshore 1031 exchange after you sell your foreign real estate property:  

  1. You must exchange your foreign property for another foreign property or properties. This means you can exchange your rental property in Panama for an office building in Colombia or France if you like. You may not exchange your foreign property for a US property.
  1. You must identify the exchange property or properties to us in writing within 45 days of closing on your sale property. We require a dated and notarized letter to ensure compliance.
  1. You must close on the exchange property within 180 days of the sale of your property. If the cash remains in the custodial account for even one day beyond the 180 day limit, the entire transaction is void, all of the tax benefits are lost, and stiff penalties will apply.
  1. You may not receive any cash from the transaction until after the purchase of the exchange property has been completed. All cash must be held by a qualified intermediary until the entire transaction is completed. * See comments below for more information.

       — A partial offshore 1031 exchange is acceptable. You are not required to exchange your sale property for one of equal or greater value. You may exchange it for one or more properties that total to less than the sale price. Of course, this will reduce the tax benefit of the offshore 1031 exchange, but it is permissible under the rules.

      — Even if you are going to purchase an exchange property for less than the sale property, you can’t receive any cash until the entire transaction is completed.

  1. Surprisingly, you may exchange your property with a related party such as a family member, business associate or relative. If you set up an offshore 1031 exchange with a related party, the only limitation is that the property may not be sold for two years. In other words, a 1031 exchange with a related party adds the requirement that you must hold the exchanged property for at least two years.
  1. The person who sells the property must be the same person who buys the exchange property. So, a husband can’t sell a property in Panama and his wife buy a like-kind property in Colombia. If H sells the property, H must buy the exchange property.

  — However, you may use a different offshore company to by the exchange property. This can be a very important distinction when structuring an offshore 1031 exchange because of the local tax rules around holding title in a foreign company.

  — The offshore company must to structured as a disregarded entity for US tax purposes.

  — For example, if H sells a property in Panama, he may buy a property in Colombia in his name or in the name of an offshore company structured as a disregarded entity.

* There are three ways to deal with the cash issue in an offshore 1031 transaction as described in #4 above (referred to as the constructive receipt rule).

You can hire any of the US based 1031 exchange providers. This will require your buyer to wire funds to a US intermediary rather than you. It also means that all of the cash in the transaction will be held in a US bank, in the name of the US firm, and subject to US government inspection.

As most expats have no interest in placing the transaction in the hands of Uncle Sam, and no non-US buyer wants anything to do with a US based 1031 exchange, here are you other options.

The most common is to bring in a licensed and bonded offshore trust company to act as the intermediary. If you would like to use a licensed provider in Belize for your transaction, I will be happy to introduce you. Note that the 1031 exchange can be processed through any licensed provider and need not be completed in your country of sale or exchange.

The second option is to ask a bank in your country to create a three way trust account. Funds from the sale will be deposited in this trust account in your name. In order to release the funds, three signatures will be required: 1)  a professional offshore 1031 exchange  intermediary, 2) yours, and 3) the bank officer.

   — This option requires a minimum of three signatures to avoid the constructive receipt rules of IRC section 1031 subsection g(6). Therefore, cooperation of the banker is typically required. None of the signatures may be related to you in any way. They may not be a family member, your attorney, your accountant or tax preparer, or anyone who has done work for you in the last two years.

Option 1 is common when escrow is the usual way to transfer real estate in your country and when the transaction is denominated is US dollars.

Option 2 is used in countries where escrow is not common and the buyer expects to pay the seller directly. It is also used when the transaction is denominated in the local currency… especially a volatile currency.

Documents Required for an Offshore 1031 Exchange

When hired to manage an offshore 1031 exchange, we typically prepare the follow documents:

The Exchange Agreement: A contract between you and the Qualified Intermediary that sets out the rules and guidelines. This must be followed to the letter in order to complete the 1031 exchange.

Notice of identification: A notarized legal notice must be sent from you to the Qualified Intermediary advising him that you have identified a property. The purpose of the legal notice is to prove you identified the replacement property within the required 45 days time frame.

An Assignment: An assignment of the sale to the Qualified Intermediary is required. This is in necessary because, in theory, the Qualified Intermediary steps into your shoes and sells the property.

Purchase Notice: A notice to the party on the other side of the transaction advising them that the transaction is indeed an offshore 1031 exchange. The purpose of notification to the other party is to prove, without doubt, that the 1031 exchange was in place at the closing.

Who Should Consider an Offshore 1031 Exchange?

Let me start with who should not use an offshore 1031 exchange. If your local capital gains rate is equal to or higher than the US rate, there is no benefit to an offshore 1031 exchange. The offshore 1031 exchange does not reduce your local tax, only your US taxes. If you pay 23.8% or more in local capital gains taxes, your US taxes should be near zero considering the Foreign Tax Credit.

If all parties to the transaction are US persons, and you don’t mind sending your cash to the US, then an offshore 1031 exchange might not be for you. A custom 1031 exchange completed offshore will be more expensive than one done by a 1031 exchange mill in the US.

Next, I suggest the gain on your foreign real estate sale should be at least $50,000 before you take on the costs and effort of an offshore 1031 exchange. If the gain is less than $50,000, the costs will take up a significant portion of the tax benefits.

This means that anyone:

  1. who is selling a property in a country with a low or zero capital gains rate,
  2. who will net at least $50,000 from the transaction,
  3. who intends to purchase a similar property within 180 days,
  4. and who  would like to maintain some modicum of privacy offshore, should consider an offshore 1031 exchange.

December 2019 Update – The above article is for information purposes only. We do not offer 1031 exchange services. I’m not aware of any firm providing global 1031 services.

finance real estate overseas

How to Finance Real Estate Overseas

To finance real estate overseas you must jump through all kinds of hoops and apply to multiple lenders in hopes of getting a decent rate. Compared to applying for a mortgage in the U.S., the battle to finance real estate overseas can seem confusing at best and silly at worst.

First, lets talk about why it’s so challenging for us to finance real estate overseas. When you’re an American investing in a foreign land, you have two strikes against you. We’re persona non grata in many countries around the world. The U.S. IRS has made it nearly impossible for us to open bank, brokerage, or escrow account. All institutions and firms that handle money are wary and weary of doing business with Americans.

And, we rarely have significant ties to the country where we want to purchase property. We have no credit history, nothing for a bank to latch on to if we default, and are as such considered a high credit risk. The only asset the lender is likely to have access to is the property.

Financing real estate overseas is like borrowing in the U.S. with a zero credit score and on a nonrecourse loan. If you are lucky enough to find a bank and escrow agent willing to take on American clients, the due diligence will be stringent and the interest rate high.

How high you ask? In most parts of Latin America, you’re looking at 6% to 12%, with the average being closer to 10%. And that’s the rate you might expect on a 50% loan to value. If you want to borrow 75% of the value of the property, that last quarter of the purchase price might cost you 20% or more.

Still Want to Finance Real Estate Overseas?

Ok, I bet many stopped reading a while back. Those of you still with me probably have had some experience offshore and knew going in that it can be expensive to finance real estate overseas. Here is what you’ve been waiting for. Some of these ideas are obvious, and some require a bit more planning.

  1. Pull equity from your U.S. home. Your most friendly partner will always be your U.S. real estate. You might get a second mortgage at 2.8% APR, just a fraction of what you will pay overseas. If you have equity in your home, this might be your first best hope to buy real estate overseas. Of course, the days of no document loans are gone, but this is still a viable option for many.
  1. Some banks lend to Americans no matter where the property is located. There are a few U.S. banks, and even fewer offshore banks, that will lend to Americans investing overseas. The international bank I recommend is Caye Bank in Belize. They offer financing for overseas real estate in a number of markets.

Another bank that finances offshore real estate, and is just a bit bigger than Caye, is HSBC. Their international division will lend against real estate in many countries, especially in Asia. Click here for more information on the international division of HSBC.

  1. Use a private lender to finance your overseas dreams. There are private or hard money lenders focused on overseas real estate. If you’ve opened an offshore company, have a foreign trustee for your asset protection trust, or have a relationship with an offshore bank, ask about private financing. You’ll be surprised how many lenders want to diversify into these markets.

Please note that this is for information purposes only. Premier Offshore is not a lender nor do we provide introductions to lenders.

  1. Negotiate with the seller. Seller financed real estate is rare in the U.S. but common offshore. Because credit ratings and the MLS system are nonexistent in most countries, mortgages are hard to come by for foreigners and locals alike. For this reason, seller financing is common.

Seller financed overseas real estate might mean you are paying the owner directly, in a rent-to-own situation, or taking over the existing mortgage with the original owner as co-signor. If you pay off the debt, the property reverts to you. If you default, the seller steps in and makes payments, taking back the home.

  1. Developer or builder financing on new overseas real estate. Just about every major new development, including condos, single family homes, and resort investments, offer financing. Many of these options are funded by the builder and offer better terms than local banks. They want you to buy in to their project so they’ve worked the market to offer the most competitive rates available.

One of my favorite developers is ECI. They have great financing options along with unique projects in some cool areas. For more information, see ECI Development.

  1. Buy offshore real estate in your IRA. Yes, you can buy overseas real estate in your U.S. retirement account. The most efficient way to do this is to form an offshore IRA LLC or Foundation (if buying in Panama), transferring your retirement account into that entity, and then making the investment.

More on Overseas Real Estate in Your IRA

And here is some good news. You don’t need to report offshore bank accounts or investments to the IRS if they are within your retirement account. IRA investments are exempt from FBAR, Form 5471, and related offshore reporting requirements. You need only inform your U.S. custodian of their value at the end of they year and he or she will handle any filings.

Of course, there are rules for buying overseas real estate in your retirement account.

First, you can’t live in the property…even for one day. It must be an investment or rental property. You can’t rent it from your IRA and may not have any personal gain from the property. All benefit are to accrue to the IRA and not you personally.

Second, if you borrow money to buy the property, you can’t pledge your IRA assets, or sign a personal guarantee, to secure the loan. That is to say, if you buy overseas real estate in your retirement account with a mortgage, you must use an unsecured loan…a mortgage backed only by the property. Such arrangements are more common overseas than they are in the U.S. and typically mean you won’t get more than a 50% LTV.

Also, if you use a mortgage, you might benefit from an advanced structure called a UBIT Blocker. See: Eliminate UBIT in Your IRA by Investing Offshore.

To peruse my various articles on buying foreign real estate in your IRA, or the tax consequences of investing in overseas real estate, please click here.

Please note that we at Premier Offshore do not offer loans. Since the posting of this article, it has become very difficult to get loans outside of the Untied States. If you would like to finance property in Belize, Costa Rica, Panama, or Nicaragua, I suggest you contact Caye Bank in Belize. This is the only lender we are working with in 2016.

Real Estate in an Offshore IRA

Distribute Real Estate in an Offshore IRA

So, you’ve diversified your retirement account and invested in real estate in an offshore IRA. . .great.  Now you need to take a distribution, what should you do?  In this article, I will describe how to distribute real estate in an offshore IRA.

 Rental real estate in an offshore IRA is one of the highest returning investments my clients have.  The problem is, the primary asset can’t be divided up and sold to pay any taxes due on required distributions when you turn 70 ½ or at another age to reduce your net tax rate.

The same problem occurs when you decide you want to live in the property.  To spend even one night in the home, you must distribute all of it from your account.

Note: One of the most common and reasonable questions I get is, “If I want to spend 2 weeks a year in the rental property, can I pay fair market value rent or take a distribution of 2/52nds (2 weeks out of 52 weeks in a year) of value?”  The answer is a resounding NO.  You may not spend any time in the property while it’s in your retirement account.  The fact that the real estate is in an offshore IRA makes no difference – you must follow the same rules.

 With this in mind, before you buy real estate in an offshore IRA, plan ahead for the forced distributions or the complete distribution if you plan to live in the property someday.  This means you must have the cash in savings or in other liquid IRA investments to cover the taxes due.

Of course, if the rental property is cash flow positive, you can use the rental income to pay the taxes.  However, because you should not use non-IRA money (i.e., savings) to cover IRA expenses, repairs, or costs incurred when the tenant moves out, be sure to run a reserve of several months before taking out funds to pay Uncle Sam.

The next item to consider early on when you invest in real estate in an offshore IRA is whether to convert to a ROTH.  I will discuss ROTH conversions for offshore investors in more detail in a future article.  For now, if you expect a return of 10-20% per year, and your income and tax bracket are  low (maybe you recently retired), converting before buying real estate in an offshore IRA may pay off big.  I understand it’s tough to pay taxes today for a potential savings in the future, but, if the upside is big in your market, you may take this tax gamble.

If you’ve held real estate in an offshore IRA for a few years, and it has maxed out on appreciation, then a ROTH conversion is unlikely to be beneficial.  Now you need to consider longer term planning.  For example, if you wish to live in the property 10 years from now, take a 1/10th distribution each year.  This will allow you to manage the tax payments and possibly reduce your total tax paid by keeping you in a lower tax bracket throughout the decade.

To re-title 10% of the property, you must go into the recorder’s office and enter the change into the record.  Hopefully, as in most U.S. states, you can make the transfer at zero value.

Remember that each of these distribution sis taxable in the U.S. and made at ordinary income rates.  I assume you have reached an age where distributions may be made without a 10% penalty.

Another way to reduce your net tax when you distribute real estate in an offshore IRA is to cut out your high tax state.  If you are considering moving offshore, or to a lower tax state, make the move 12 months before you take the distribution.

For example, if you are living in California, a distribution of real estate in an offshore IRA may be taxed at 10% or more.  The same distribution to a tax resident of Belize or Panama should be at zero state tax . . .of course, federal tax still applies.

Finally, the Foreign Tax Credit may apply and provide a dollar for dollar credit for any tax you paid to the country where the property is located.  Considering IRA distributions are taxed at ordinary rates, it’s unlikely the Foreign Tax Credit will totally eliminate U.S. tax, but it will ensure you don’t pay double.

I note that some countries charge transfer taxes and duties rather than a capital gains tax.  Special attention should be paid to these, because they may not qualify for the credit but might be added to the property’s basis and therefore reduce your taxable profit.

If you are considering taking your IRA offshore, or would like to set up a specialized real estate investment structure, please contact us at info@premieroffshore.com for a confidential consultation.  We will be happy to work with you to structure your offshore IRA in a tax efficient manner.

Real Estate in an Offshore IRA

Do I Need to Report my Offshore Real Estate on IRS Form 8938?

The general rule is that foreign real estate is not reportable to the IRS on Form 8938. Good news and an asset category that has been ignored by the IRS hawks trying to swoop in on as many international resources as possible.

But, read on! While the default rule is that foreign real estate is not reportable, about 95% of my clients do need to report their real estate holdings on IRS Form 8938. This is because foreign property is usually held in an offshore trust or foreign corporation and your shares in entity must be reported on Form 8938 and elsewhere.

Let’s take a step back: Form 8938 – Statement of Foreign Financial Assets was created in 2011 and must be filed by anyone with significant assets outside of the United States. If you qualify to file Form 8938, you are to report financial accounts maintained by a foreign financial institution.  Examples of financial accounts include: Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.

Also, you are to report stock or securities issued by a foreign corporation (like the one that holds your foreign real estate), trust or other entity (such as an offshore LLC), and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person.  Examples of these assets include:

  • Stock or securities issued by a foreign corporation;
  • Stock or membership interests issued by a foreign limited liability company;
  • A note, bond or debenture issued by a foreign person;
  • An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;
  • An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;
  • A partnership interest in a foreign partnership;
  • An interest in a foreign retirement plan or deferred compensation plan;
  • An interest in a foreign trust or estate;
  • Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

Foreign real estate is not a foreign financial asset required to be reported on Form 8938.  So, a personal residence or a rental property outside of the United States does not need to be reported on this form.

However, if the real estate is held through a foreign entity, such as a corporation, partnership, or trust, then your interest in the entity is a specified foreign financial asset that might be reportable on Form 8938.  The value of the real estate held by the entity is used to determining the value of the shares to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.

All of this is to say that, if you purchase foreign real estate in your name, without an entity, you do not need to include that asset on Form 8938…but be careful, there are a number of traps for the uninitiated.

First all rental income must be reported on your personal return (Form 1040 and Schedule E), regardless of amount and regardless of whether you are required to file Form 8938. In most cases, reporting your rental property on Schedule E will create a loss, and thereby reduce your US taxes. For more information on this and taking depreciation on international real estate, check out my article US Tax Breaks for Foreign Real Estate.

Second, if you open a foreign bank account to facilitate the purchase of the property, or the receipt of rental income, and that account has more than $10,000 in it on any one day of the year, then you must report the bank account on US Treasury Form TD F 90-22.1, commonly referred to as the FBAR or Foreign Bank Account Report. I will discuss this form in more detail below.

Want to avoid filing the FBAR?

  • When you purchase the property, wire funds from your US account in to escrow. Don’t allow the purchase price to go through an offshore account.
  • Keep less than $10,000 in the operating account. You might need a foreign account to pay local expenses and receive rent, but you can avoid this form by maintaining a minimum balance.

What if you do not want to hold foreign real estate in your name? What if you, like most investing abroad, prefer the privacy, security and protection of a corporation?

Even if you purchase foreign real estate in a corporation, you might not need to file Form 8938. Remember that Form 8938 applies to those with “significant” assets outside of the United States. Here is how it works:

If you are living in the United States, are a married couple filing a joint tax return, and your reportable foreign assets on the last day of the year do not exceed $100,000, and are not more $150,000 on any day of the year, you don’t need to file Form 8938.

If you living in the United States, are single or married filing separate, and your reportable non-US assets on the last day of the year do not exceed $50,000, and are less than or equal to $75,000 on any day of the year, you don’t need to file Form 8938. For additional information, see the instructions to Form 8938.

If you are living abroad, are a married couple filing a joint tax return, and your reportable non-US assets on the last day of the year are not more than $400,000, and do not exceed $600,000 on any day of the year, you don’t need to file Form 8938.

If you living abroad, are single or married filing separate, and your reportable non-US assets on the last day of the year do not exceed $200,000, and are not more than $300,000 on any day of the year, you don’t need to file Form 8938. For additional information, see the instructions to Form 8938.

NOTE: Be careful when calculating the value of your foreign assets. You need to convert the value from your foreign currency to United States dollars each year. As the US dollar falls, the relative value of your assets increase. For an example, see my article Weak Dollar Crushing the Foreign Earned Income Exclusion.

Do you spend some time in the United States each year? Are you unsure if you are a US or international person for the purpose of Form 8938? The answer is simple: If you qualify for the Foreign Earned Income Exclusion (FEIE), then you are an international person. If you don’t qualify for the FEIE, you live in the US for tax purposes. Yes, even if you spend significant time abroad, you live in the US for the purpose of this form if you don’t qualify for the FEIE.

If you don’t know whether you qualify for the FEIE, or have no idea what the FEIE is, then you are probably a US person. Basically, if you are a resident of a foreign country for a full calendar year, you qualify for the FEIE. Alternatively, if you spend more than 330 days per year abroad out of any 365 day period, you qualify for the FEIE.

Note: This is a summary of a complex topic. For a detailed article on the FEIE, check out Foreign Earned Income Exclusion Basics.

If you decide to hold your foreign real estate in a company or trust, you will have filing obligations in addition to Form 8938.

The most critical offshore tax form is the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

The law imposes a civil penalty for failing to disclosing an offshore bank account or offshore credit card up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.

In addition to filing the Foreign Bank Account form, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.

Other international tax filing obligations include:

  • Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
  • A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity.
  • Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.
  • Form 3520 – Annual Return to Report Transactions with Foreign Trusts.
  • Form 3520-A – Annual Information Return of Foreign Trust.
  • Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation.
  • Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation.

Once you begin to expand your investment options beyond the United States, your IRS picture will become more complex. But, don’t let big brother bully you in to keeping your money at home. Don’t let these forms dissuade you from diversifying outside of your comfort zone or achieving significantly higher returns than are available from your local bank.

You have two options: 1) get in line and keep your money at home or 2) break from the crowd, file your forms, and make some real money.

If you choose diversify abroad, I suggest you hire a tax preparer who is experienced in international investments and forms to handle your reporting. Your local guy probably has no idea what any of this means and the cost of making a mistake is just too great for you to take on the IRS alone.

finance real estate overseas

US Tax Breaks for Offshore Real Estate

Do you own property outside of the United States? Are you thinking about investing in offshore real estate? Are you an offshore real estate mogul looking to reduce or eliminate your US taxes? This article will cover all areas of US taxation of offshore real estate and provide insider tips and techniques to get your US tax bill under control.

So long as you carry a US passport, the IRS wants you pay tax when you sell offshore real estate. US citizens are taxed on their worldwide income and there are very few offshore tax breaks for capital gains and the passive income. Thus, it doesn’t matter whether you are living in the good ‘ole U S of A or abroad, passive income and capital gains are taxable as earned.

  • Active investors, real estate professionals, and those who buy in a retirement account are exceptions to the rule.

This means that offshore real estate is taxed the same as domestic real estate (with the exception of depreciation). The same tax rates apply, the same deductions for expenses are allowed, and the same credits are available. I will describe the best of these below.

In most cases, if buy a property in Panama and sell it after 3 years, you have a long term capital gain in the US, and owe tax at 20% to 23.8%. For the rest of this article, I will assume a long term US rate of 20%.

Offshore Real Estate and the Foreign Tax Credit

This doesn’t mean you must pay double tax, first in the country where the property is located and then again in the United States. The IRS allows you to deduct or take a dollar for dollar credit for any taxes paid to a foreign country…for every dollar paid to Panama your US bill should go down by one dollar. In practice, this never works out perfectly, but it does eliminate most double tax.

For example, let’s say you bought a property in Medellin, Colombia in 2005 for $100,000. In 2013, you received an offer you couldn’t refuse for $150,000, giving you a capital gain of $50,000. The capital gains tax rate in Colombia is 33%, so you pay $16,500 to Colombia.

The capital gains rate of Colombia is significantly higher than the United States at 20%, so you should not expect to pay any tax to the US. You will report the sale on Schedule D of your US personal return and deduct or take a credit for the $16,500 paid on Form 1116, leaving nothing for the IRS to leach on to.

Now let’s say you sell a property in Panama, where capital gains are taxed at 10%. In this case, you will pay 10% to Panama ($5,000) and 10% to the United States ($5,000), to get to the US 20% rate for long term capital gains.

If you had this same transaction in Argentina, Ecuador or Costa Rica, where real estate sales are not taxed, you will pay all of the “available” 20% to the United States.

Important Note: When deciding in which country to buy real estate, that country’s capital gains rate only comes in to play if it exceeds the US rate. If a country’s capital gains rate is 0% to 20%, you will pay 20% in total. If a country’s rate is more than 20%, then only the excess should be considered in your decision. For example, you are paying a 13% tax premium to buy property in Colombia because Colombia’s rate is 13% higher than the US’s capital gains rate.

Many clients look at a country like Costa Rica and think they are getting a deal or saving money by paying no capital gains tax when they sell their property. Well, these countries have other taxes and duties to make up for their zero capital gains rate, which might not deductible on your US return. In most cases, you are better off buying property in a country whose system mirrors that of the United States.

Cut Out the Tax Man – Offshore Real Estate in Your IRA

The exception to the rule above is offshore real estate held in an IRA LLC. By purchasing offshore real estate in your retirement account, you can defer or eliminate US tax on both rental profits and capital gains. If the country where your property is located doesn’t tax the sale, then you just might avoid the tax man all together. If the country taxes you at a relatively low rate, such as Panama at 10%, this might be the only tax you pay (ie. the IRA cut your total tax bill by half).

Let me explain: If you move your IRA or other type of retirement account away from your current custodian and in to an Offshore LLC, you can invest that account in foreign real estate. The LLC is owned by your retirement account and holds investments on behalf of that account. You buy the rental property in the name of the LLC, pay operating expenses from the LLC, and profits flow back in to the LLC and in to your retirement account.

I note that this structure is for investment or rental real estate and not property you want to occupy. If you later decide to live in the property, it must first be distributed out of the retirement account to you and taxes paid if applicable.

If you wish to purchase offshore real estate with funds from your IRA and a non-recourse loan, or you are in the active business of real estate, you can add a specially structured offshore corporation to eliminate US tax.

If you buy real estate with an IRA in the United States, you get the joy of paying tax on the gain attributed to the money you borrow (the mortgage). If 50% of the purchase price comes from your 401-K and 50% from a loan, half of the rental profits and half of the gain is taxable, with the other half flowing in to your retirement account.

Take this same transaction offshore and no US tax is due. Tax free leverage in a retirement account is one of the great offshore loopholes. Please check out this article for more information.

Offshore Real Estate and Depreciation

Owners of rental real estate in the United States get to utilize accelerated depreciation and deduct the value of the property over 27.5 years. If the property is offshore, you must use straight-line depreciation over 40 years and you get less bang for your depreciation buck.

On a $100,000 rental property, your annual depreciation deduction would be about $3,636 for US situated property vs. $2,500 if located outside the country. This means you would be paying a premium of $1,136 offshore real estate.

Don’t get to excited and cancel your offshore real estate deals just yet! The benefit of depreciation can be fool’s gold. The accelerated depreciation is great if you plan to hold the property for 20 years. However, if you plan on buying, improving and selling over a short period (a few years), then accelerated depreciation will cost you money, not save you money.

This is because depreciation is “recaptured” when you sell the property. Every dollar you were allowed to deduct over the years prior must be paid back, is added to your basis, and taxed at 25% rather than 20%. So, as a rough example, if you have a gain of $50,000, and took depreciation of $20,000, you owe tax at 20% of $50,000 for $10,000 plus 25% of $20,000 for $5,000. Therefore, you total tax due is $15,000.

The more depreciation you take, the more you must repay. If you hold a property for many years, taking a deduction today, and paying it back in the distant future, is a benefit. If you will sell the property in 3 or 5 years, taking the deduction now, and paying an additional 5% in tax later, is of little to no benefit.

I have had several clients over the years shocked at the size of their tax bills from the sale of a rental property. They had planned for a 15% rate (the previous long term rate), and ended up at 20% + recapture. In States like California, where values property values have gone down, it is possible to sell a rental at a loss and still have a big time tax bill from recapture.

This might lead some to think a good strategy is to not take depreciation, especially on property you plan to flip ASAP. Well, the IRS has a surprise for you: The tax law requires depreciation recapture to be calculated on depreciation that was “allowed or allowable” (Internal Revenue Code section 1250(b)(3)). This means you will pay tax on depreciation whether you take it or not.

All of this is to say that not being allowed accelerated depreciation on offshore real estate might be a good thing.

$250,000 / $500,000 Exclusion and Offshore Real Estate

As I said to begin this article, all of the same US tax rules apply to offshore real estate that apply to onshore properties. This holds true for the primary residence exclusion: If you qualify, you can exclude up to $250,000 single or $500,000 married filing joint, from the sale of your primary residence.

To qualify, you must own and occupy the home as your principal residence for at least two years before you sell it. Your “home” can be a house, apartment, condominium, stock-cooperative, or mobile home fixed to land anywhere in the world.

Tax Tip: You can take the $250,000/$500,000 exclusion any number of times. But you may not use it more than once every two years.

Have you owned and been renting out a property in Panama for a few years? You might consider kicking out those renters, moving to Panama, and occupying the property for two years before you sell.

Did you convert a home from your primary residence to a rental property? The rule is that you must have lived in the property for 2 of the last 5 years to qualify for the exclusion. Therefore, you can live in it for two years, rent it out for up to 3 years, and then sell and get the full exclusion.

To get the $500,000 exclusion, both a husband and wife must live in the home as their primary residence. It is possible for one spouse to qualify while the other does not. For example, husband is living in the United States and visiting his wife and family in Panama. On a joint return, only the wife may take the exclusion for $250,000 when they sell the home in Panama.

You don’t need to spend every minute in your home for it to be your principal residence. Short absences are permitted—for example, you can take a two month vacation and count that time as use. However, long absences are not permitted. For example, a professor who is away from home for a whole year while on sabbatical cannot count that year as use for purposes of the exclusion.

You can only have one principal residence at a time. If you have a home in California and a condo in Panama, the property you use the majority of the time during the year will be your principal residence for that year. So, it would be possible for Panama to be your primary resident for one year and California to be your primary residence the next. Before you sell, make sure you have spent at least 2 of the last 5 years in the property.

Like-Kind / 1031 Exchange with Foreign Property

Because you get the “benefit” of all US tax rules when it comes to offshore real estate, you can use like-kind exchanges (also called a Section 1031 exchange) to defer US tax. The only caveat is that you can’t exchange US property for foreign property – it must be a foreign property for foreign property transfer.

In a like-kind exchange, you defer paying taxes by swapping your property for a similar property owned by someone else. The property you receive is treated as if it were a continuation of the property you gave up. The benefit is that you defer paying taxes on any profit you would have received.

You may only exchange property for other similar property, called like-kind property by the IRS. Like-kind properties must have the same nature or character, even if they differ in grade or quality. All real estate owned for investment or business use in the United States is considered to be like kind with all other such real estate in the United States, no matter the type or location. For example, an apartment building in New York is like kind to an office building in California.

All real estate owned for investment or business use outside of the United States is considered to be like kind with all other such real estate outside of the United States. Therefore, you can exchange an office building in Panama City, Panama for an apartment building in Medellin, Colombia. You may not exchange a property in Panama with a property in New York.

In practice, it’s rare for two people to want to swap their properties with each other…especially offshore, where only US persons benefit from this loophole. Instead, one of the owners usually wants cash and the other (the gringo) wants to avoid tax on his gain. In this case, you can still qualify for a like-kind exchange by adding a licensed third party specialist to the deal, called a qualified intermediary or QI.

Let’s say your property in Panama is worth $300,000, and you have a capital gain of $100,000. You can defer paying tax on this sale if you can find someone in Colombia who wants to swap. Of course, no Colombian wants any part of a US 1031 exchange because they get no benefit…only an American living in Medellin would find the tax deal interesting. So, after you identify the property you want in Colombia, you need to hire a QI.

Essentially, the QI buys the property in Colombia and then enters in to a like-kind exchange with you. So long as you can identify the replacement property within 45 days after you sell the Panama property, and your replacement property purchase is completed within 180 days, you have a qualified 1031 exchange. Because of these time limits, it’s a good idea to have a replacement property lined up before you sell your property.

You should also note that this tax strategy is only advantageous in countries with low capital gains rates. If the country has a tax rate equal to or higher than the US, there is no reason to enter in to an exchange. It will not reduce your tax in the country where the property is located, only in the United States. If the Foreign Tax Credit will eliminate your US tax obligation, then an exchange is pointless.

By swapping a property in Panama with a property in Colombia, you are deferring US tax on 10% of the gain. This is because you pay 10% to Panama and nothing at this time to the United States. When you sell the property in Colombia, there is no reason to enter in to a like-kind exchange – unless you want to defer the gain from Panama a second time. The tax rate in Colombia is higher than in the United States, so no tax will be due to Uncle Sam on the gain from that property.

  • Let’s say you had a gain of $100,000 on the property you sold in Panama in 2011 and you will have another gain of $50,000 when you sell the property in Colombia in 2016 (very good for you by the way).
  • When you sold the property in Panama, you paid 10% to Panama and transferred the gain to the property in Colombia for US tax purposes.
  • When you sell the property in Colombia in 2016, you will pay 33% on the $50,000 to Colombia, leaving nothing for the US on this portion of the transaction.
  • You will also recognize the deferred capital gain on $100,000 from the Panama property. You already paid 10% to Panama, so you will pay 10% ($10,000) to the US in 2016 from the sale of the Panama property in 2011.

All of this planning and structuring allowed you to defer a 10% US capital gain for 5 years.

Combo Deal: Yes, you can combine a 1031 exchange with the $250,000 primary residence exclusion. To qualify for both, you must hold the property for more than five years and live in it for at least two of those five years. Then, you can use the exclusion to reduce or eliminate the capital gains, including tax carry-over from a like-kind exchange.

Offshore Rental Properties

Rental income and expense from offshore real estate is reported on your personal return, Schedule E, just as a US rental property would be. You must keep US quality books and records, including all expenses from management, improvements, repairs, and taxes paid. You must follow all US tax rules for these deductions and expenses, such as depreciating improvements and deducting repairs.

The IRS has a right to audit you offshore real estate, so be ready. It may be common to pay your bills in cash in Colombia, but you will have a tough time deducting any expenses without a receipt and proof of payment (such as a cancelled check).

An area of emphasis in an audit of offshore real estate is travel and other expenses associated with visiting the property. If you are flying to Panama five times a year, hanging out for a week, and then expensing these trips against your one rental unit on Schedule E, the deduction will not survive an audit. In fact, it is likely to be the cause of an IRS investigation.

I generally advise clients that they may visit their rental properties once a year for a couple of days. If they have no other business abroad, and are not using the getaway as a vacation, the entire trip may be deductible. If you have a large portfolio abroad, then you might get away with spending more time traveling, but one trip per year is a safe deduction.

When reporting your rental property, remember to take depreciation. As stated above, the only difference in offshore real estate is the allowed depreciation method. You must utilize straight-line depreciation over 40 years.

US Tax Filing Obligations for Offshore Real Estate

Your offshore real estate comes with a number of new and exciting US tax forms to file. It is important you master these forms or hire someone experienced in there preparation. Failure to file, or filing late, can result in outrageously high penalties.

  • These draconian penalties are aimed at Americans hiding money offshore. Unfortunately, regular folks, with simple offshore investments, often get caught in the crossfire.

The most critical offshore tax form is the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.

For example, if you opened an offshore bank account to receive rent payments, and that account has more than $10,000 in it on any given day, then you must file an FBAR. If you send the funds to buy the property in to your offshore account, and then on to escrow, you must file this form. If you wired money from your US bank account directly in to escrow (which is a bank account you do not control), then the FBAR is not required.

The law imposes a civil penalty for failing to disclosing an offshore bank account of up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.

In addition to filing the FBAR, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.

Other international tax filing obligations for offshore real estate include:

  • If your property is held in a foreign corporation, you must file Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
  • If you hold your offshore real estate in a foreign LLC, you may need to file Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.
  • If your property is held in an international trust, a Panamanian foundation, or a Mexican Fideicomiso, you may need to file Form 3520-A – Annual Information Return of Foreign Trust and possibly Form 3520 – Annual Return to Report Transactions With Foreign Trusts.
  • If your foreign assets are significant, you must file Form 8938 – Statement of Foreign Financial Assets was new for tax year 2011. The filing requirements (who must file) for this form are too complex to list here, so please see the instructions before filing.

The Offshore Real Estate Professional

If you are living and working abroad and in the business of real estate, you can realize some great tax benefits. The following section is for those who spend a significant amount of time and effort working their offshore properties, and not those with only one or two apartment units.

The typical investor in offshore real estate may only deduct his losses against other passive income. If you do not have any other passive income, losses are carried forward until you can use them.

An exception to this rule applies to a) active participants and b) material participants in the management of offshore real estate.

As an active participant in offshore real estate, you can deduct up to $25,000 of passive losses against other income (like wages, self-employment, interest, and dividends) on your US tax return.  This allowance is phased out on a 50% ratio if your adjusted gross income is $100,000 or more.

As an active participant, you must share in the management, financial and operational decisions of the property and be knowledgeable in the day to day issues (usually by reviewing financial statements and other documents produced by the manager). This means you should be responsible for arranging for others to provide services like repairs, collect rents, etc. You may have a paid manager for the property and still be considered an active participant, so long as you manage that manager.

Besides the need to qualify as an active participant you must also meet these additional requirements:

  • You must own more than 10% of the property.
  • You cannot be a limited partner…you must be a general partner.
  • You must be an active participant in the year of the loss and the year that the loss is deducted. For example, if you are a passive investor in 2012, and active in 2013, you can’t deduct a loss from 2012 on your 2012 or 2013 return (because the 2012 loss was carried forward).

If you are a material participant in offshore real estate, you are much more involved and in control than an active participant. As a material participant (sometimes referred to as a real estate professional), you are in the active business of real estate and may deduct your expenses against any and all of your other income, without limitation or AGI phase-out.

It is relatively easy to qualify as an active participant. It is far more challenging to be classified as a material participant in offshore real estate. If you can meet the criterion, you will find that there are major international tax breaks and loopholes available to the real estate professional.

NOTE: The major benefit of being offshore and material participant / real estate professional is that you may draw a salary from an offshore corporation and qualify for the Foreign Earned Income Exclusion. This tax break is only available to offshore professionals and not those living or working in the United States.

To be classified as a material participant or real estate professional you must be active year-round in the operation of your offshore real estate business. You must work on a regular, continuous, and substantial basis, and offshore real estate should be your primary occupation. If you work a full time job and do real estate on the side, you are probably not a real estate professional.

According to the IRS, you materially participate in offshore real estate:

  • If (based on all of the facts and circumstances) you participate in the activity on a regular, continuous, and substantial basis during the year; or
  • If you participate in the activity for more than 500 hours during the year.

To meet the facts and circumstances test, offshore real estate should be your principal trade or business and you must have significant knowledge and expertise in that industry.

You can prove your level of involvement to meet the 500 hour test by any reasonable means. This includes calendars, appointment books, or narrative summaries identifying work performed and hours spent. Contemporaneous daily time reports or logs aren’t required but it is your responsibility to prove you meet the test, so any evidence you can muster will be a benefit. This is to say that the burden of proof is on you to demonstrate you qualify as a real estate professional.

In order to materially participate in offshore real estate, you should be living and working abroad. It would be near impossible to qualify as materially involved in properties in Colombia while living Texas. Therefore, you should also plan to qualify for the Foreign Earned Income Exclusion (FEIE). When the FEIE is combined with an eligible offshore real estate business, you can take out up to $97,600 in salary from that enterprise free of Federal income tax and make use of a number of other tax mitigation strategies.

In other words, a qualified offshore real estate professional can deduct his or her expenses against all other income, regardless of source and without limitation based on his or her AGI, and draw out up to $97,600 in profits free of Federal income tax. If a husband and wife both qualify as material participants and for the FEIE, they can each take out a salary of $97,600, for a total of $195,200 of tax free money.

To qualify for the FEIE, you must be out of the US for 330 out of 365 days or a resident of another country. If you are a resident of another country, preferably where your properties are located, then you can spend up to 4 months in the US each year.

The 330 day test is quite simple: you are either out of the US or you are not. The 365 days need not be in a calendar year (for example, May 2013 to May 2014 is fine) and there is no requirement to file for residency or spend a certain amount of time in particular country.

The residency test is more challenging. You must be a resident for a calendar year and move to a particular country with the intention of making that your home for the foreseeable future. You must submit a residency application to that country, file taxes, and generally become a member of the community.

The 330 day test is based on travel days and the residency test involves your intentions to move to a particular country and make that your home. It is always easier to prove how many days you are in the US. To put it another way, it can be a challenge to prove your “intent,” especially if your needs or intent changes after only a year or two.

For this reason, I suggest you qualify under the 330 day test in your first year abroad and then move to the residency test. This is the safest way to deal with the possibility of changes in circumstances.

If your offshore real estate business is focused in one country, you can obtain residency in that nation after a year and utilize the residency test to qualify for the FEIE. Utilizing the residency test in the long run is the best way to ensure you receive the benefits of the FEIE while being classified as a real estate professional.

If your offshore real estate business spans many countries, and you are on the road several months of the year, then you may need to utilize the 330 day test in year two and beyond. You may not be able to put down roots in one country, or you might not want to become a tax resident of any nation. In this case, you will need to watch your travel days to and from the US closely. If you miss the 330 days, even by one day, you lose the FEIE in its entirety and pay US tax on 100% of your salary.

If you qualify for the FEIE, you must operate your offshore real estate business through a foreign corporation. In order to minimize worldwide tax, you might consider a holding company in a jurisdiction that will not tax your income and subsidiaries in each country you do business to transact on behalf of your properties.

Whatever your structure, and wherever you decide to setup shop, you must incorporate outside of the United States. If you decide to skip this step, you will pay US self-employment tax on the salary. Even though you might pay nothing in Federal income tax, you will pay around $15,000 per person in SE tax. US SE tax is eliminated completely by the use of a properly structured foreign corporation.

The FEIE allows you to take out up to $195,200 (joint) free of Federal income tax, and a foreign corporation eradicates US SE tax. What if your profits are significantly more than $195,200?  You can retain earnings in to your foreign corporation to be taken out as salary subject to the FEIE in future years or as dividends whenever you choose. Withdraws that qualify as salary under the FEIE, are taken out tax free. If they come out as dividends, they are tax deferred for as long as you see fit to maintain the corporation…which can be decades, even if the business has long since been shuttered.

If you are able to combine material participation / active business status with the Foreign Earned Income Exclusion, and do so through a foreign corporation, you might just operate your offshore real estate business free of any and all US tax and keep Uncle Sam out of your pocket entirely. But, this is a major endeavor and one you should not take lightly.

You must be ready to defend your position in an audit and keep US quality books and records to support both positions. To succeed in an audit of your active business status, keep extensive files, to-do lists, home and mobile phone records, business plans, project descriptions and instructions to employees documenting your active involvement in day-to-day activities of the business.

In order to prove your FEIE, keep track of travel to and from the United States and have your credit card and other records available to support you claims of days out of the country. If you will use the residency test, file for residency and, if possible, a work permit. Also, file a tax return in your country of residence and put down as many roots in to that community as possible. You may be able to structure your affairs in such a way as you pay very little in tax to this country, but you should file a return.


The world of offshore real estate investing can be a complex maze of US tax compliance, deductions, credits and exclusions. If you are a professional, or you’re considering starting an offshore real estate business, you will need a solid plan to minimize your worldwide tax obligations. Such a plan must take in to account your US requirements and those of the country(s) where your property is located.

I can assist you by forming basic holding companies for the passive investor, creating a custom plan for the professional, placing your cash and properties behind appropriate barriers for asset protection, and keeping all of these constructs in US tax compliance.

Feel free to phone me at (619) 483-1708 or by email to info@premieroffshore.com with any questions and a confidential consultation.

December 2019 Update – we no longer offer 1031 exchange servies. I am not aware of any global firm that supports these transactions.

Taxation of Foreign Real Estate Investments

EDITORS NOTE: This article was published in 2010 and has some valuable information. For a more recent and detailed article on this same site, click here.


When it comes to investing in property overseas, there is often little difference than if you were investing in U.S. property. Three situations bear investigation:

1. The first is the purchase of raw land or a building for speculation. In this scenario, the investor buys a property overseas and plans on holding it for a period of time to later sell for a profit. The result is a capital gain taxed by both the U.S. government and, in some cases, the state of domicile of the taxpayer. The U.S. has favorable tax rates (currently 15%) if the holding period is over one year. There may also be a capital gains tax in the country that the property is located in. If this is the case, a credit can be used to offset U.S. taxes.

In this situation, there is no difference in how the U.S. taxes the sale of an investment property in the U.S. and one outside of the U.S.

2. Let’s look at the same scenario, except this time, instead of selling the property outright you want to exchange it into another property. This can be accomplished by using the provisions of section 1031 of the IRS code. Under this section, you can defer some or all of the gain from the sale of one property by simultaneously purchasing another property of “like kind.” Here again, there is no difference in the taxation of property inside the U.S. and outside the U.S.

What we must look at in this situation is the exact definition of “like kind.” When dealing with real property, the government gives quite a bit of latitude in what is considered “like kind.” Examples are raw land, a single family house, a condo, an apartment building, a restraint, etc. As long as you’re selling real estate to buy real estate, you will generally be allowed to perform a 1031 exchange.

The main thing to be aware of is that foreign real property and U.S. real property is not considered to be like kind. For instance, you cannot exchange a rental property in California into a rental property in France or to raw land in Costa Rica (or vice versa).You could however exchange the rental property in France into raw land in Costa Rica. What this boils down to for you, the investor, is that, if you want to move an investment back into the U.S. you will have to pay taxes on any gains you made.

If a property qualifies as “like kind” then you must also qualify the exchange. There are complexities involved with this type of transaction, and you should hire a tax consultant to facilitate the transaction and make sure that you don’t do anything to disqualify the non-recognition of gain. Another critical point is that your new property needs to be more expensive and have a larger note on it. Otherwise a portion of the gain will be recognized and taxable. For more information, see the “Nontaxable Exchanges” section of IRS Publication 544 Sale or Other Dispositions of Assets available at www.irs.gov/pub/irs-pdf/p544.pdf.

3. The third consideration is when you have a rental property overseas. In this case, it is much the same as a rental situation within the U.S. The main consideration is that rental activities are considered passive. This means that losses from your passive rental activities can only offset income from other passive sources. If you do not have any other passive income, the losses are suspended until such time that you have passive income or you sell the property—at which time the losses are released and can offset other types of income.

An exception to this rule applies to active participants in the management of real property. As an “active participant,” you must share in the management decisions for the property, arranging for others to provide services like repairs, etc. Owning property in a foreign country makes it more difficult, but not impossible, to qualify as an active participant. If you meet this requirement, you can deduct the losses from your rental property against your other income (like wages, self-employment, interest, and dividends).

Besides the need to qualify as an active participant you must also meet these additional requirements:

  • You must own more than 10% of the property.
  • You cannot be a limited partner.
  • You must be an active participant in the year of the loss and the year that the loss is deducted. The benefit phases out at an adjusted gross income of between $100,000 and $150,000.

Finally, you will only be allowed straight line depreciation on property outside of the U.S. You are not eligible for the various accelerated depreciation methods.

Implications of Your “Tax Home”

If you only have one tax home regardless of whether you reside in the U.S. or overseas, there are few, if any, complications.

For people with multiple homes or multiple business ventures at which they spend varying amounts of time, it gets trickier. These situations are decided on a case-by-case basis, according to individual circumstances. Some of the facts that will be looked at are:

  • Total business time spent at the different locations.
  • The amount of business activity that is carried on at each location.
  • The significance of the business activity to the taxpayer’s return (where is more money made and what percentage of the total income does it represent?)

Let’s look at some examples of how the tax home concept can affect the taxes of the international real estate investor.

Example 1—Bob and Jane live in the United States and work close to their home. They own some real estate outside the U.S.

In this case, their tax home is their residence and all expenses they incur when visiting their realestate (whether rental property or investment property) are deductible against the income fromthat property.

Example 2—Bob and Jane live in the United States and work close to their home. They spend part of the year at their foreign property—a small house in France with a vineyard.

In this case, whether they can deduct all their living expenses (travel, meals, utilities, incidentals) as “away-from-home” expenses in pursuit of a business is dependent on the facts. Which home do they spend more time at? Where do they make more of their money? How much of their time at the foreign home is devoted to the vineyard business?

If it is determined that more time is spent at the foreign location, the deductions will not be allowed. This is exactly what happened in the case of Bowles v. United States. The taxpayers claimed away-from-home expenses for their grape-growing business, but the IRS and then the courts ruled that, since more of the couple’s time was spent at the vineyard, the vineyard was their tax home and the deductions weren’t allowed.

Example 3—Bob and Jane live in the United States and work close to their home. They own a seasonal B&B in Europe, which they spend the summer operating.

In this case, if Bob and Jane can prove that their tax home is in the United States, all of their living expenses can be deducted as away-from-home expenses (in any case the direct expenses of operating the business are allowed).

What is important to note is that you need to plan your actions beforehand. If you are going to operate a business, or own real estate overseas, and you want to deduct your overseas living expenses as away-from-home expenses, you need to make sure that you create a fact pattern consistent with a tax home in the U.S. Direct expenses of the business or investment are always deductible and are not dependent on where your tax home is.

Note: There is an important distinction in the concept of “tax home” for purposes of deducting away-from-home expenses and qualifying for the foreign earned income exclusion. Multiple homes may cause the loss of the away-from-home expenses but, as long as they are all overseas, you may still qualify for the earned income exclusion and the housing exclusion.


EDITORS NOTE: This article was published in 2010 and has some valuable information. For a more recent and detailed article on this same site, click here.