This was written by Sarah Sindledecker and Kathryn von Matthiessen, an associate and partner at Cantor & Webb respectively.

Here is the first of a two-part guest feature looking at how clients in Latin America have a variety of goals in the Miami marketplace, from purchasing real estate strictly for investment purposes to a permanent move.

Indeed, executives have told this publication previously that from a wealth management perspective there are a number of reasons why South Florida is a region of great opportunity. Not only does the demographic reflect wealth migration from other parts of the US, but there is also an international component which very much includes Latin America.

If the three most important words to a real estate investor are location, location, location, then Miami, FL, has it all.  Within its ever expanding skyline are a myriad of options.  From high-end condominiums to five star commercial spaces, this real estate epicenter is truly an investor’s paradise.  So it may come as no surprise that Miami has become the pinnacle of desire among the jetsetters, trendsetters and most sophisticated of investors from Latin America.
 
From a local US tax practitioner’s standpoint, the influx of foreign investment into the Miami real estate market originates predominantly from several key Latin American jurisdictions.  On the one hand, varying degrees of economic and political instability at home may be a driving factor.  Overwhelmingly, on the other hand, is the significant and widespread effect of efforts among local governments in Latin America to take advantage of this new age in tax transparency to enhance collection efforts and increase revenues for their local economies.  For example, countries such as Peru, Colombia and Chile have each enacted some form of offshore anti-deferral legislation.  Other jurisdictions such as Venezuela and Argentina remain committed to the concept of a blacklist and/or whitelist as a means of controlling outbound investment from its borders.  

In the US, the more recent expansion in US tax compliance has been driven by FATCA, which creates US reporting requirements for offshore structures, even those owned by foreign investors.  FATCA requires a 30 per cent withholding tax to be deducted from certain payments made to a foreign financial institution unless that institution has entered into an agreement with the IRS or followed other procedures for reporting.  With heightened tax transparency being the norm and the rise in popularity of inter-governmental information exchanges, Latin American investors are seeking opportunities in the Miami real estate market as a compliant and secure way to invest.  

When it comes to investing in US real estate, there is no “one-size-fits-all” approach that works for every LatAm client.  While some investors are looking to purchase, others are seeking a return in exchange for funding someone else’s acquisition.  For clients who are not already committed to a particular property or equity ownership generally, providing properly structured financing to a qualified US buyer can have important US tax benefits.  Lending activities, loan modifications and related party transactions can create significant traps for the unwary.  A client should always consult competent US tax counsel before committing to any deal involving debt.   

With equity investments, there are also several threshold issues that need be considered in connection with the purchase. It is critical to understand the nature of the client’s investment, meaning whether the property will be used by the client personally or to generate rental income instead.  Additionally, the cost and the likelihood of appreciation are factors which will impact the type of structuring that is appropriate from a US tax point of view.  Safety concerns in the home country may create a preference for anonymity. Because both the tax and non-tax considerations can play a key role in the planning, it is important to discuss all angles with a client in advance of even signing the purchase contract. While it can be relatively straightforward to provide for assignability, transfers involving US real estate, including even an assignment of a real estate purchase contract, can give rise to US tax and reporting obligations.  Even though most real estate transactions are “time is of the essence” deals, there are significant benefits to having US tax advice in advance which ultimately can save a client extra expense in the end.  

US tax planning also does not take place in a vacuum. Home country considerations are as important as the planning from a US tax perspective.  Blacklists, whitelists and inter-governmental information exchange programs can play a key role in determining which jurisdictions are used within a structure.  Because needs and goals change over time as well as the laws of any particular jurisdiction, it is imperative to optimize flexibility to account for these changes. Cross-border planning necessitates working with competent counsel on the other side with a common goal in mind.  The most efficient structure from a US tax standpoint is entirely inefficient if it does not work with regard to the laws of the client’s home country, and any other jurisdiction where foreign holding structures are used.  For this reason, home country advice early on in the process can be a critical factor in saving a client time and money in a transaction.  
 
For US tax planning purposes, there are primarily three areas of concern for most LatAm clients: reducing exposure to US income tax, limiting the burden of reporting from a US tax compliance perspective and protecting against the imposition of US estate tax in the future.  Properly structured “portfolio debt” achieves all three goals.  A foreign client can receive interest on financing of this nature US income tax-free.  The client will not have any US reporting obligations with respect to the loan.  Additionally, promissory notes which qualify as “portfolio debt” are specifically exempt from US estate tax.  

In contrast to a pure financing arrangement, any income and gain which is generated on an equity investment in US real estate ordinarily will be subject to US income tax.  Savvy US income tax planning in this regard is therefore aimed at preserving the availability of US capital gains rates on a sale if it is likely that the property will appreciate in value.  Because the US capital gains tax rate is not available to corporations, owning US real estate in corporate form may not be desirable for a LatAm client.  Two-tiered partnerships and trust structures are preferable for this purpose.  

From a US tax compliance point of view, owning US real estate through a corporation can be beneficial because the US tax compliance burden stops at the corporate level.  For this reason, corporate ownership can be optimal if the client desires enhanced anonymity.  Unlike a corporation, ownership through a two-tiered partnership structure may not provide the client with any anonymity.  Additionally, there are several US tax filings that can be required in connection with a two-tiered partnership structure which can be somewhat burdensome, costly and surprising to a client who is uninformed in advance.  A trust, on the other hand, can work nearly as well as a corporate structure, depending upon the nature of the investment and the client’s objectives, to minimize individual reporting and provide anonymity to the trust beneficiaries.     
 
With respect to US estate tax planning, owning US real estate through a properly structured and funded corporation or trust can give a client complete assurance that US estate tax will not be imposed as opposed to a two-tiered partnership structure which provides less certainty.  As a result, clients who seek definitive protection from US estate tax may opt for ownership in corporate form even though they will lose the preferential US capital gain tax rates on a sale of the property by the corporation.  Alternatively, those seeking absolute safety from US estate tax may have the best of both worlds with a trust which, like the two-tiered partnership structure, will preserve US capital gains tax rates on a sale.    

Given the many considerations involved in the process of planning for investment by LatAm clients in US real estate, it is important for the investor to seek the advice of US tax counsel as far in advance of the purchase or investment as possible.  Being well advised early on can prevent a client from expending unnecessary time, money and effort to correct the defects associated with his or her investment.  Only competent US tax counsel can be relied upon to structure an investment in US real estate properly, taking into account the many variables each situation presents while balancing all of the client’s objectives.