Nonresidents will frequently use corporations to own U. S. real estate. (Briefly -- use a non-U.S. corporation, mind the corporate formalities, and hope that the U. S. tax authorities don't change their minds). Corporations are chosen because they protect against estate tax, people know and understand corporations, and because they are cheap to create and operate.

I try to get my clients out of them and into better ways to own their real estate.

THE PROBLEM WITH CORPORATIONS

The problem with corporations is simple. When the property is sold, corporations will pay Federal tax on the capital gain at about 35%. Other holding structures can result in a Federal capital gain tax of 15%.

So what would you rather do? Pay $350 in tax for every $1,000 of profit? Or pay $150 for every $1,000 of profit? (This is a rhetorical question. Don't raise your hands, class).

FIXING THE PROBLEM TRIGGERS TAX

If you take real estate out of a corporation, you are triggering a tax event. This is treated like a sale (and tax is due) even though the ultimate owner didn't change at all. The change in ownership is approximately like taking your keys out of your left pocket and putting them in your right pocket, but the tax authorities still want to impose tax.

Pay a huge tax now because you'll save some tax later? Not appealing.

BAD REAL ESTATE MARKET MEANS GOOD RESTRUCTURING OPPORTUNITY

Right now the real estate market is suffering. Values are declining in many markets. This means that for many people, the property is worth about what they paid for it a few years ago.

And more to the point, it means that if they engineer a "sale" from their corporation to some other holding structure, the sale will generate zero taxable profit, thus no tax.

EXAMPLE

Imagine someone who bought a house for $2,000,000 a couple of years ago, put it in a corporation, and used it from time to time as a personal residence. The market went up -- it was worth $3 million. Now the market came down again, and the appraisers say it would sell for $2,000,000 today.

We engineer a sale from the corporation that owns the house. The sale is for today's fair market value: $2,000,000. The corporation files a tax return and declares zero profit, and pays zero tax. The new owner is a holding structure we have created--a holding structure that will give us a 15% tax rate on capital gains, not 35%

COTTAGE INDUSTRY

We have a little pipeline of these deals right now. We picked up a couple more today, in fact. Smart move. Even if you assume modest appreciation (like 5%), over the long haul this will save hundreds of thousands of dollars in capital gains tax.