Found 1st investor.. Need expert advice. - Posted by BAK

Real Estate Investing Real Estate Law
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Posted by Carmen on March 18, 1999 at 10:09:43:

Now, I am out of my depth!

Thanks, John, for your answers. I think we are saying the same things. My “aggressive” ideas were just the tip of the iceberg, but that’s a discussion for another board. I do work within the law, and take only calculated risks - but I like to stretch the creative envelope when possible.

This has been somewhat of an academic exercise for me, since I no longer am involved in the Corp. mentioned - however, it got my wheels turning and thinking it may not be a bad idea to do it again - I had interest at one point from foreign investors, and was just not interested in working with or for anyone. I would still keep my own corp, and this would be in addition to that, though - I get the willies when I have to rely on anyone but myself to eat. This latest post has gotten the wheels turning even faster…

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Found 1st investor… Need expert advice. - Posted by BAK

Posted by BAK on March 16, 1999 at 12:38:55:

A potential investor has posed a couple of questions to me and I need expert suggestions.

Deal Details: Investor is located outside the US. He prefers flips. We’re doing ALL CASH deals for deep discounts. The cash is all his. The leg work is all mine. He wants title put in his corporate name.

  1. With title in his corporate name aren’t I functioning as a real estate agent? Could I be seen as performing w/o a license?

  2. What’s a fair split of the profits upon resale (50/50)?

  3. What type of contract should be drawn between the two of us?

Also, this will be my first deal. I’m confident and knowledgeable I can handle whatever happens. However, as a wise investor he has asked for references. As is obvious, I haven’t any. I do, however, have a profile I created last year for a deal that fell through outlining experience in the areas of management and title work that I felt qualified me as a reliable and effective professional.

  1. How do you suggest I respond to the investor’s query for references?
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Re: Found 1st investor… Need expert advice. - Posted by Rob FL

Posted by Rob FL on March 16, 1999 at 19:22:50:

I am not an expert by any means.

If the title will be taken in this investors corporation, and you do not 1) have an ownership interest in the corporation, 2) work for this company as an employee, or 3) have some type of ownership or lien against the property, THEN you are acting as a real estate broker and any profit you take away is sort of a finder’s fee (i.e. a commission). You would be practicing real estate without a license in most states, definitely here in Florida. You probably won’t get caught though unless you do it on a frequent basis.

If it were me, I would do something to get either an ownership right in the property or in the corporation. If the investor is dead set against that, then I would move on and find someone else. It sounds like your investor friend is really only looking for a Realtor to locate deals for him.

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Re: Found 1st investor… Need expert advice. - Posted by Carmen

Posted by Carmen on March 16, 1999 at 13:50:20:

The tax issued mentioned below is valid to a point. Foreign nationals who purchase homes above $300K will need to shell out about 30% to Uncle Sam upon the sale of that property. To get around it, I would create a new US-based company (C-corp, LLC, etc.). Voilá! No more foreign ownership. I know it cannot be an S-Corp due to foreign owner; I’m not sure about LLC.

Decide ahead of time what the split will be, and you could be shareholders in this new company. Then you could pay yourself dividends (watch the double-taxation issues there, too)

If he insists on owning 100% of the company, or you decide you don’t want the partnership headaches, then, you could hire yourself as president/manager/director of the new company and pay yourself a salary/commission/etc. on each deal, or do whatever the tax gurus tell you to do to keep more of the money.

If you own a company or are directly employed by one who will be doing investment “for their own benefit” - meaning, you are not trying to sell third party houses to third party people (only try to sell the homes that your company owns/controls, and don’t offer your sales services to anyone else), you should not need a license. At least, in FL you wouldn’t. If you have any doubts, call your division of business and professional regulations.

Can’t give you advice on the references, but a good business plan and some personal/business references should do.

Good luck!

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Taxes - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 16, 1999 at 13:05:21:

You’ve got big time tax issues if the investor is a non-resident alien. Withholding taxes are 31% unless a treaty applies. If treaty applies, check out differential rates between dividends, interest, etc. and plan accordingly.

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Re: Found 1st investor… Need expert advice. - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 16, 1999 at 14:28:37:

Hi Carmen,

True to a point BUT I COMPLETELY disagree with the “no more foreign ownership” part. Uncle Sam ain’t quite that dumb when it comes to collecting money (He IS pretty dumb when it comes to spending it…). If the foreign national is a partner in a partnership they are probably “engaged in the conduct of a trade or business” and file their own return and pay taxes on the return. BUT the partnership (or LLC) still has an obligation to withhold under IRC 1446. The withholding obligation is thus shifted (depending on who the partners are- the burden of withholding usually falls on the domestic partner(s) directly or indirectly) but not eliminated. The rates are different and better or worse than the 30% tax depending on the circumstances.

In the case of a corp, dividends paid to foreign individuals must be withheld at the 30% rate (Back to IRC 1441). So a corp does not effectively remove the withholding burden (No, “loans” are not advisable). Use of a foreign corp GREATLY complicates things- icky “branch profit” rules, among others, apply.

Bottom line- do not assume that foreign investor’s taxes are only his problem. Whether paying him directly or using a partnership/LLC or corporation, withholding obligations apply- probably to YOU.

John Hyre

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Re: Taxes - Posted by BAK

Posted by BAK on March 16, 1999 at 13:40:36:

The investor does not live in the US. He is simply looking to invest here. I would think any tax problems would be his concern. Let me know your thoughts, and thanks.

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Re: Found 1st investor… Need expert advice. - Posted by Carmen

Posted by Carmen on March 16, 1999 at 21:23:33:

I am by no means a tax accountant or attorney, but I have owned a C-corporation in which the shareholders were foreign nationals. The corporation itself, however, IS a United States entity and does NOT fit into the foreign-national taxation structure. Whether the shareholders are foreign nationals is completely irrelevant. I do agree that the withholding will be relevant, if profits are taken in the form of payments to foreign nationals and/or dividends.

I would not and will not EVER, EVER, EVER, EVER do a partnership, general or otherwise, with anyone, let alone a foreign national. And foreign corps, branches, etc. are also a bit above and beyond - and not necessary.

How the foreign national gets paid, and what the foreign national does with their dividend" does need to be addressed, just as how the US partner gets paid and takes his/her dividends. And there are many ways of doing it, creatively, yet legally - so the corp shows a minimal profit.

A lot of “expenses”/purchases in a corp., which can be deducted, can miraculously benefit one of the shareholders, so cash need rarely be removed or paid as dividends or income. Amazingly, a corp can also purchase from a vendor, foreign or domestic, quite a bit of recurring-use products vital to the operation of the corp … or pay for the services of a consultant … more expenses??? How a foreign vendor claims that income in-country becomes his/her issue to deal with.

One need be only slightly more creative in this instance than when one has one’s own corp - after all, most smart corps show little profit. Taxes are unfortunately impossible to eliminate, but they can be minimized by taking a different approach.

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Re: Foreign investor tax… Need expert advice. - Posted by KevinMiami

Posted by KevinMiami on March 16, 1999 at 16:33:31:

I noticed that the $300,000 figure was used as a threshhold. Does this mean that if a foreign investor keeps their total investmen-ts below $300,000 then they are not subject to this tax?

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Re: Taxes - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 16, 1999 at 13:56:34:

BAK,

His taxes are very much YOUR concern because you are almost certainly (depending on entity structure) required to withhold and remit the correct amounts. IRS gets to come after YOU if you do not. See Section 1441 of the Internal Revenue Code and the applicable Tax Treaty, if any.

John Hyre

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Good Post - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 17, 1999 at 06:43:06:

Carmen,

Whether the shareholders are foreign nationals IS relevant. You are admirably creative and aggressive in paying those shareholders. That creativity and aggressiveness is necessary to avoid the very issues that I mention. One word in buying products/services- the Service is VERY aggressive on transfer pricing. They will reprice a sale if it is “unreasonably” low or high depending on the circumsatnaces. If such payments are in fact in the nature of return on ownership interests, the IRS will not hesitate to reclass part of the price on expense items as disguised dividends (with penalties and interest, of course). That area of the law is fiendishly complex. OK, the chances of getting caught are small. The law, however unlikely it is to be enforced, is still relevant. My assumption is that you’ve been advised on how to aggressively walk the line or live in the “gray” area when it comes to transfer pricing. My concern is that an investor with less familiarity might unknowingly cross that line.

I agree with you re partnerships. The same condirations are present with LLC’s, which follow many of the same rules as partnerships. Given that LLC’s are widely used, the partnership comments are relevant.

I agree that foreign corps are unnecessary and way above and beyond- just trying to be thorough.

Please understand- I am all for aggressive and creative. But avoiding taxation where non-resident foreigners are involved is not as simple as merely creating an entity as I (mistakenly?) thought you were suggesting. Your creative approach is laudable but dangerous if improperly implemented (that transfer pricing thing). Bottom line: Having a foreign investor raises very significant tax concerns for domestic participant. Taxes are not just the foreignor’s problem, nor do they disappear upon formation of an artificial entity. As is the case with most tax issues there are creative ways to minimize the bite. This area of the law is complex by any standard, so such creativity should be vetted by a professional- ESPECIALLY if serious transfer pricing issues are involved.

John Hyre

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$300k exception - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 17, 1999 at 06:55:57:

Kevin,

The exception referred to is as follows:

No withholding required by INDIVIDUAL (i.e.- not LLC or corp, etc.) buyer of property acquired from foreign seller for use as personal residence if entire amount realized by seller = or< $300,000. Foreign seller is still on the hook for taxes- buyer is just not required to withhold. See IRC 1445(b)(5). This is one exception to the general rule that buyer must withhold 10% of SALES PRICE when purchasing property from non-resident foreign person (individual OR entity).

John Hyre

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Re: Foreign investor tax… Need expert advice. - Posted by Carmen

Posted by Carmen on March 16, 1999 at 21:26:24:

I’ll have to check again, it’s been over a year, but what I remember is that if the sale price of the property is below 300K, then the 30% withholding will not apply. I can check again with the Board of Realtor lawyers, if you’re interested - e-mail me and remind me …

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Let me jump in here - Posted by Carol

Posted by Carol on March 17, 1999 at 06:59:43:

folks, I brought this up a couple of months ago, without good resolution, so I am glad tosee this discussion.

What happens in the situation where the foreign investor simply makes a loan to my corp secured by a mortgage on a given property? Does the withholding come into play on the repayment of that loan?

I have a foreign investor/friend who wants to make some of his capital available to me for rehab/flips, and this is where we have gotten hung up

He is involved in a US corp already and does file taxes here, but doesn’t want the withholding. He is not a resident.

Keep talking. I can’t be the only one interested!!
Thanks.
Carol

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Re: Let me jump in here - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 17, 1999 at 09:09:00:

Carol,

Interest is subject to withholding, same as above posts. Treaties usually provide lower rate (5-10%) for interest.

Using HIS US corp to make a loan- as opposed to a jointly-owned US corp- adds substance to Carmen’s point about “no more foreign owner” from your perspective (maybe that is the sort of structure that Carmen had in mind). If his US corp makes loan to you and you are NOT a shareholder, you should be able to avoid withholding obligations. The corp will have certain obligations, but you should not have to worry about them. This statement MUST be confirmed by research given the number of exceptions and attribution rules that apply where foreiners are concerned (e.g.- make sure that no “look-through” rule exists). I would also look at the treaty, if any, with his country.

John Hyre