¿Cómo se puede combinar unas empresas (LLC) con unos fideicomisos (land trust) para conseguir el resultado óptimo?  La respuesta está aquí.

Previously, we looked at 10 advantages of a land trust [Florida land trust].  The purpose of that article was to make people aware of the possibilities with this truly useful vehicle through analysis of an LLC vs. Land Trust.

I find that clients who are unfamiliar with trusts will almost invariably decide in favor of an LLC.  When it comes down to it, clients would rather go with an inferior solution they understand than something that sounds exotic or too good to be true.

That’s understandable.  So, let’s increase awareness.

LLC vs. Land Trust

When viewed side-by-side with an LLC, I think you will find a Florida land trust is not such an exotic creature after all.  Part of the problem may simply be vocabulary.  Juxtaposing equivalent terms may provide real estate investors with a better understanding of, and greater comfort level with, land trusts.

Limited Liability Company (LLC) vs. Land Trust

LLC  –  OWNER/MEMBER

The person who puts in the time and start up capital to launch a limited liability company is usually referred to as the “member” or “manager.”  Owners will often use additional titles such as “president” or “CEO” because they are more commonly recognizable.  There is a technical difference, which we will get into a bit below.  For now, the point is that limited liability companies have “owners.”     

Land Trust  –  GRANTOR

In simple terms, we can say the “grantor” of a trust is equivalent to the owner of an LLC.  There is such a thing as a “non-grantor trust,” but, for a simple land trust, the grantor is the one who sets up the trust, just as an owner sets up an LLC.  

There is one difference worth mentioning.  Trusts were originally designed for estate planning.  So, the trust will have a “beneficiary(s),” such as the grantor’s children or wife, for example.  One common set up is where the grantor takes the profit/proceeds generated by the trust during the grantor’s lifetime and, after the grantor dies, the assets of the trust go to the beneficiaries.  

This simple set up adds an estate planning feature to the land trust that you do not get with an LLC.

LLC  –  OPERATING AGREEMENT

The Operating Agreement contains the company’s bylaws.  Along with the Articles of Organization, the Operating Agreement provides the key terms that govern the company.  For example, that is where you will find provisions about decision-making authority, election of officers, dissolution of the company, etc.

It is possible to do a bit of succession planning with an operating agreement, such as naming a successor president.  There is a limit to how far you can plan succession with an operating agreement, though, because it just gets weird.  You soon run into family scenarios that seem out of place in a business document.  

Judge’s do not expect to see a bunch of estate planning provisions in a company’s operating agreement — i.e. healthcare, custodial duties, rights of heirs, etc.  So, it is uncertain whether those provisions would be enforced by a court.   

Trust  –  TRUST AGREEMENT

The equivalent of an operating agreement is the “declaration of trust” or “trust agreement.”  (same thing)  The trust agreement has provisions similar to those of an operating agreement about management of the trust’s business affairs.  The difference is that trusts are typically used for estate planning, so you can readily include provisions regarding heirs, healthcare, funeral arrangements, guardianship, and  other things you would normally expect to see in a will.  There is nothing weird about estate planning through a trust, so you can be sure a judge would indeed enforce those provisions.  

If you are using land trusts strictly for real estate investment, you will probably use a straight-forward business trust, which will not likely have much estate planning to it.  But, should you so choose, you can get double-duty out of a trust agreement in a way you cannot with an operating agreement.

LLC  –  PRESIDENT/CEO

Entities cannot speak for themselves or sign documents, so they have to be represented by one or more human beings.  For this reason, a  president and/or other corporate officers are named to act on the company’s behalf.  

Often, the president is the owner of the company, but that is not necessarily the case.  The president could simply be an employee who has no ownership interest.

Trust  –  TRUSTEE

Like the president of a company, the “trustee” acts as the representative of the trust.  Many times the grantor will act as the trustee.  In that case, the trustee is for all practical purposes the “owner” of the trust.  There is some flexibility here, though.  There can be situations where the grantor would not want to be the trustee, just as an owner of a company may not want to be president.

If asset protection is a concern (when is it not?), then the grantor should appoint someone else to be the trustee.  Or, if it is not convenient for the grantor to run the operations, it may greatly simplify things to have a local person act as trustee.  Likewise, if the grantor wants a smooth transition when he/she dies, then using someone else as trustee — or naming a successor trustee — is an excellent solution.

You can name anyone you want as a trustee, though there are some good reasons to make it an attorney, accountant, or trust company, rather than a friend or family member.  That is a topic for a different article, though.

LLC –  EMPLOYEES & CONTRACTORS

Obviously, these are the workers who carry out the company’s business activities.

Trust  –  EMPLOYEES & CONTRACTORS

A trust can also employ workers, though that would not be common for a land trust.  Usually, a trust will hire outside companies or contractors to manage properties, provide maintenance and repairs, invest trust funds, etc. 

LLC  –  PARTNERS

Naturally, you can have more than one owner (i.e. partners) and divide the ownership interests however you decide. 

While it is common for partners of the LLC to have different percentages of interest in the company, or to have different voting rights, it would not be common to stipulate to much more than that.  

Trust  –  BENEFICIARIES

The beneficial interest given to the beneficiaries of a trust is similar to ownership interest divided among partners in an LLC.  You do, however, have much more control over beneficial interest.  You can name as many beneficiaries — and their successors — as you want, and you have complete control over _

• • how much they receive
  • how they receive it
  • when they receive it
  • what conditions must be met
  • who you want to act as custodian, if a beneficiary is a minor
  • skipping generations

That is probably far enough for now.  You can read about cost savings and flexibility of land trusts here.

For now, the purpose is to understand some of the inner workings of a land trust and realize it is not so entirely different from an LLC .  There is nothing particularly exotic about a land trust.  Just the terminology is different.

And, where there are differences, the land trust has the advantage.

 ~ Jeff Harrington, Esq.

I. Overview of FIRPTA

Simply put, FIRPTA is legislation intended to insure foreign owners of US real property pay the capital gains tax when they sell their property.  After all, there is a natural temptation for someone living abroad to simply sell the property and disappear without paying tax.

The IRS knows this, so they have put the obligation on the buyer and the title agent to withhold 15% of the sale price (10% for qualifying transactions) as a sort of escrow for payment of capital gains tax.  So, it’s not the seller that gets in trouble if the withholding is not done.

Since it can be hard to go after the foreign seller, the law is aimed at the parties the IRS knows it can find and punish.

For the most part, the 15% is calculated on the sale price, not the profit realized by the foreign seller.  So, usually, the withholding is a substantial amount, which is why clients come to us for help.

For a title agent, dealing with foreign sellers represents tremendous liability.  In fact, our office often receives referrals from title companies that are less familiar with international transactions.

Title agents who are unaccustomed to dealing with FIRPTA can get freaked out and end up making the process more slow and painful than it needs to be.

II. The Typical Scenario

Sometimes the foreign investor does not know about FIRPTA when making the purchase.  So, instead of creating a domestic land trust or LLC to purchase the property, the buyer just makes the purchase in his or her own name.   Given the choice, that approach is not the best for many reasons.  Click here for other options.

However, there are other times when purchasing through a land trust or company is not an option.  For example, some lenders may require the borrower be a natural person.  It is not impossible to get a mortgage in the name of a company or trust, but it can certainly be more difficult.  That said, since foreign buyers usually do not rely on US financing for their purchases, this is not generally an issue.

When it is time to sell the property, these are the questions to ask:

(i)  Can I avoid the withholding requirement altogether?

(ii)  If I can’t avoid withholding, can I minimize the amount withheld?  (10% instead of 15%)

(iii)  If I can’t avoid withholding, can I at least get a quick refund?

Of course, each situation is a bit different, so do not hesitate to contact our office (free consultation) when you have a situation with a particular closing.  But, if you are looking to generally educate yourself, this article is for you.

III.  Withholding Requirement

First of all, how do you calculate the the withholding?  The IRS uses the term “amount realized” from the sale, which is defined as:

• The cash paid (usually the purchase price);
• The fair market value of other property; or
• The amount of any liability assumed by the transferee after the transfer.

Sellers often say to us “But, I’m not making any money on the sale.”  Ultimately, the amount of tax liability will depend upon the profit or loss from the transaction.  But, that determination happens at the end of the fiscal year when you file your tax return.  Unfortunately, for purposes of the FIRPTA withholding, you do not get to “self-declare.”

So, you may very well get the withholding back after you file your tax returns.  But, at the time of the closing, the IRS wants to hold onto 15% (or 10%) of the sale price for you. 

Who is a “US person”?

If the seller is any of the following, then FIRPTA does not apply:

• a citizen or permanent resident of the US
• a non-resident who meets the “substantial presence” test
• a domestic, multi-member LLC
• a domestic partnership
• a domestic corporation
• a trust domiciled in the US that has at least one trustee who is a US person
• any estate that derives income from within the US

Who is a “resident”?

If you have a green card (i.e. permanent resident), then you are a US person, irrespective of how many days you have been physically present in the US.

If you are not a permanent resident, but have spent 183 days or more in the US in the past three years, then you are considered a “US person” for tax purposes.  The calculation of the 183 days (i.e. the “substantial presence test”) is a bit complicated:

• a minimum of 31 days in the current calendar year
• each day present in the current year is counted as a full day
• each day present within the preceding year is counted as one-third of a day
• each day present within the year that is two years prior to the current calendar year is counted as one-sixth of a day

Tip: The easiest way to do the math is to access Homeland Security’s I-94 page online.  That will give you a clear record of the time you have spent in the US during the most recent five (5) years.

What if the property has more than one owner?

If the property is owned jointly by U.S. and foreign persons, the “amount realized” is allocated between the seller parties based on the capital contribution of each.

Example:  If there is one US investor and one foreign investor, and they each put in 50% of the price to acquire the property, then the “amount realized” for FIRPTA purposes will be half the sale price.

What if the owner is a company?

If the seller is a foreign corporation, then the company must withhold 35% of the gain it recognizes on the distribution to its shareholders.  So, using a foreign corporation as your investment vehicle is usually not smart.

IV. Exceptions

Residence that costs less than $300,000

Probably the most common exception is where the buyer intends to live in the property as a home, as opposed to acquiring the property for rental/investment purposes.  That will work, but only if the sale price is less than $300,000.

Additionally, for the first two years, a family member has to live in the property “for at least 50% of the number of days the property is used by any person.”  So, that means, the days the house is vacant do not count, but you cannot have a tenant in the property for more time than you or your family use the property.

Limited Liability Company as Seller

This is where things get interesting.  Real estate investors often hold their properties in LLCs, so this is the section that merits the most careful analysis.

First of all, if the LLC is registered in a foreign country, then it is subject to the FIRPTA withholding unless it is a single-member LLC and the owner is a US person.

The real question, though, is what to do with domestic companies.

Domestic LLCs

Disregarded Entity.  Under the tax code, there is the concept of a “disregarded entity.”  If the LLC has only one owner (i.e. member), and the owner has not made any special elections with the IRS, then the LLC will be considered a “disregarded entity.”  In that case, whether FIRPTA withholding is required or not will depend upon the status of the owner.  If that individual or entity is a non-US person, then the LLC is subject to the withholding.

Multi-Member LLC.  By contrast, if the LLC is has more than one owner, then the default classification (i.e. no specific election taken) is “partnership,” not a “disregarded entity.”  So, a multi-member domestic LLC will generally not be subject to withholding.

An LLC formed in the US can safely sign the non-foreign affidavit and forgo withholding if _

1. 1. 1. It has only one member and that member is a US person
      2. It is has more than one member 
      3. It has made the election to be taxed as a corporation (i.e. C-corp)

Sworn Statement

If the seller provides a declaration that he or she is not a foreign person, and provides a tax ID number (i.e. social security or EIN), then that will get the buyer and title agent off the hook.  Obviously, if the information is false, the seller will be guilty of perjury and could have problems with the IRS.  The same is true if the buyer and/or title agent actually knows the information is false.

No Gain or Loss

If the transfer was to a family member, or some other situation where there truly was no profit or loss on the transfer, then the seller can provide a notice to that effect.  In that case, the buyer and title agent will not be liable.  Just be sure a copy of that notice gets filed within 20 days of the closing at the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409 .

This exception may also apply in short sales, but that is not automatic because the calculation is based on the sale price rather than proceeds.  So, contact our office on that one.

V. Waivers 

This is where your experienced, resourceful lawyer can really be helpful.  There are certain mechanisms available for obtaining waiver of the withholding requirement.  There are three in particular that provide some wiggle-room.

• The amount to be withheld is greater than the tax liability.  The withholding is calculated on the full sale price, even though you may have a mortgage to pay off.  Ultimately, of course, you will only have to pay tax on your profit, not the full sale price.  So, it could very well be that your tax liability is lower than the amount of the withholding.  When that is the case, we should be able to get you a waiver.

• Agreement to pay tax with conforming security.  Since the whole idea of FIRPTA is to make sure sellers pay the capital gains tax, the IRS will consider waiving the withholding requirement as long as it has other assurances the tax will be paid.  These are the forms of security that are generally acceptable:
  • bond with surety or guarantor
  • bond with collateral (the Ibis property would probably work)
  • letter of credit (if you have funds abroad, this may be an option)

Under this scenario, we (the title company) would first determine the exact amount of tax due on the transaction, and then make arrangements to provide assurances that the tax will be paid before April 15.  If we can do that to the satisfaction of the agent, the IRS will issue a waiver.

• Nonstandard application.  This analysis really has to be done case-by-case, though I can give you an example.  One client wanted to sell his property in order to raise enough money to meet the requirment for an investor visa (E-2). In that case, the argument was really quite compelling.  After all, the IRS just wants to know the seller will not disappear without paying tax.  Well, if the very reason for the sale is to be able to remain in the US on a long-term basis, that is pretty good assurance the seller will pay his taxes.  So, we were able to obtain a waiver.

Bear in mind it does take a little time to get the certificate back (up to 90 days) so, if you decide waiver is the way to go, you will want to get the application together sooner rather than later.

VI. Amount of Withholding

There is one situation where the amount of withholding is 10% instead of 15%.  That is where the buyer plans to live in the property (see details above), and the sale price is greater than $300,000 but less than $1 million.

Otherwise, at the time this article is published, the withholding is always 15%.

VII.  Refund of Withholding

In general, you would apply for refund after filing your return and paying any tax due.  So, how quickly you get your money back–assuming you are entitled to a refund–depends up on you . . . to a point.

You do not have to wait until April of the following year, but you do have to wait until the end of the fiscal year in order to file a complete return.  Some exceptions may apply, depending upon your circumstances, but that is the general framework.

Also, there are some mechanisms for early refund but that, again, would really only apply if the withholding were greater than the tax liability.  The criteria and process would be the same as in § V above.  If you do file for an early refund, the IRS has 90 days to respond.

 VIII.  Conclusion

As usual, the moral of the story is to seek out a lawyer sooner rather than later.  Certainly, if you are a foreign investor, it would be worth your while to meet with an H&S attorney to go over options regarding structuring your real estate investments.

~ Jeff Harrington, Esq.

The Opportunity Zone program has been around since 2017 but, since the Pandemic, it has received some beneficial tweaks you should know about.

Benefits

Some of the deadlines under the program have already passed, but the benefits still available are impressive.

The first thing you need to understand is that we’re really talking about TWO separate tax-saving opportunities.   We’ll call them GAIN #1  and GAIN #2.

GAIN #1 – Previous Capital Gains

Here, we’re talking about the capital gains you made in 2021 (or the first quarter of 2022).

You’re just sitting on this money at the moment, getting ready to pay taxes on it.  But, hold on.  There is an alternative.

If you act quickly, you can take those gains from 2021 and reinvest them in a Qualified Opportunity Zone Fund.  That will exempt those gains from your 2022 tax return.

Then, you can defer the tax on those 2021 gains until 2027.  So, you have six (6) years in which you can make money on Uncle Sam’s money.  Let me give you an illustration.

Example:  Let’s say you sold real property last year and made a profit of $500,000.  Depending on your tax bracket, you probably owe 20% in capital gains tax on that money, which would be $100,000.  Under this program, Uncle Sam basically says:

You can hold onto my $100,000 as long as you reinvest it in an Opportunity Zone.  And, whatever you earn on that money in the next six years, you get to keep. 

That is not a bad deal AT ALL.  But, brace yourself.  Here comes the crazy part.

GAIN #2 – Capital Gains from QF

Continuing with our example, if you leave that $100,000 investment in the Qualified Fund (QF) for at least 10 years, you are going to get all the capital gains derived from that investment TAX FREE.  Let that sink in.

Example:  Let’s say you find a good QF for your $100,000.  You can probably expect your Fund Manager to grow the fund at a rate of 10% to 15% per year.  That will essentially double your investment in five (5) years.  So, by year five, give or take, your $100,000 investment will have grown to $200,000.  And, by year ten (10), it will be worth $300,000.  That leaves you with a capital gain of $200,000 by the end of the 10-year cycle.

Guess what.  You will pay exactly zero taxes on that $200,000 gain. 

That, my friends, is rather amazing.

Now that we have your attention, look for follow up articles with details on _

• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

The good news is that, for purposes of a QF, what is considered “capital gains” is not just proceeds from the sale of real estate.  In fact, all of the following are qualified capital gains:In order to get the tax advantages available under the Opportunity Zone program, you have to invest “qualified capital gains.”  So, it is not just any kind of money that can be invested in a Qualified Fund (QF).  For example, if you have put away some cash from your regular salary or other compensation, that money will not qualify for the tax benefits because it is not “capital gains.”

• Sale of Real Estate
• Sale of stocks and bonds
• Sale of shares in a corporation
• Sale of a partnership interest
• Sale of cryptocurrency 
• Sale of REIT
• Sale of land
• Sale of machinery
• Sale of timber and other natural resources
• Sale of unharvested crops and livestock
• Gains from leaseholds (at least 1 year old)

So, as long as the funds you intend to invest can be defined as “capital gains,” you can invest in a QF and receive the very advantageous tax benefits of the Qualified Opportunity Zone program.  That is one significant advantage of a QF over the traditional 1031 exchange.

See our related articles for more on how to take advantage of the Qualified Opportunity Zone program:

• What are the benefits of a QF?
• Who can invest in a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

These QOZs were created to spur economic growth by extending generous tax incentives to investors who invest their qualified capital gains into Qualified Opportunity Funds (QOFs).  Ultimately, the federal program open to ALL investors.

First, be aware that the investor can be either an individual or an entity.  Many people wisely hold their investments in an LLC or trust (even REITs).  That is not a problem.  Also,  the investor, whether an individual or entity, does not have to be a US citizen or US resident.

Foreign nationals can also invest in a Qualified Fund (QF).

If you do your investing through an entity, you will likely want to use that same entity as the “investor” in the QF.  However, if you may not be required to do so.

The analysis turns on the question of “Who is the taxpayor?”

If the investment vehicle you use is a “pass-through” entity, such that you report the gains/losses on your personal return, then you personally are the “taxpayor.”  In that case, you have the option.  You can either make the investment in the QF with the same investment vehicle — usually an LLC or trust–or you can make the investment in your individual name.

By contrast, if your investment vehicle is taxed as a C-corp, then that entity is itself the “taxpayor.”  So, you should use that entity as the investor in the QF.

Caveat:  In order to get into the Opportunity Zone program, you have to invest in a qualified fund (QF).  These QFs are privately owned and managed, so some of them may impose certain restrictions.  One common restriction is that you be an “accredited investor,” as defined in the tax code.  To be clear, this is not a requirement imposed by the federal program itself.  But, you may find it is a criteria imposed by managers of certain QFs

This article addresses just one specific aspect of the Qualified Opportunity Zone program.  Be sure to follow these links in order to get additinal information:

• What are the benefits of a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

According to the IRS:

Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States. Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.

The legislation passed with bipartisan support.  The Republicans liked the tax savings, while the Democrats liked the investment in under-developed neighborhoods.

Where are the Opportunity Zones?

Congress left it to individual states to determine what areas would be designated as an Opportunity Zone.  (See List of Designated Tracts)  There are some nice interactive mapping tools available online as well.

With some notable exceptions, you can expect opportunity zones to be neighborhoods traditionally considered “under-developed” or “disadvantaged.”

Projects Permitted by a Qualified Fund

Keep the purpose of the legislation in mind, you will understand why Qualified Funds (QFs) are not permitted to invest in just any kind of project.  Here are some of the guidelines.

New Construction

QFs are not allowed to buy a property and simply throw some paint on it.  The project must be brand new construction or a “substantial rehabilitation,” which means the QF put more money into the improving the property than it did to purchase the property.

 Examples of Qualifying Projects

Generally, QFs are expected to invest in projects that bring a benefit to the community by creating jobs or otherwise.  Some examples include the following:

• Affordable Housing
• Community Revitalization
• Economic Development
• Infrastructure Investment
• Mixed-use Development
• Multifamily Residential
• Renewable Energy Investment
• Single Family Residential
• Small Business Development
• Workforce Housing

Profitability

Naturally, an important aspect of the projects is profitability.  You can expect good QF managers to make strategic decisions when determining what projects to undertake in the Opportunity Zone.  After all, investors not only receive the capital gains from the projects, but they also participate in the yearly cash flow.

See our related articles for more on how to take advantage of the Qualified Opportunity Zone program:

• What are the benefits of a QF?
• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.