Foreign Investment In South Florida Real Estate Heats Up

According to a recent report, international buyers are driving sales at several large real estate projects in South Florida. The 200-unit Trump Hollywood sold out less than two years after lenders foreclosed on the 41-story oceanfront tower. In Miami-Dade County, all 1,800 units at Icon Brickell have been sold, and the 254-unit Jade Ocean in Sunny Isles Beach also is sold out.

Among the reasons for this trend are the combination of low prices and a weak dollar. These factors have resulted in increased investment from Canada, Brazil, Argentina, and Mexico, among other countries, to South Florida. In fact, according to a recent survey from the National Association of Realtors, Florida was the fastest-growing U.S. real estate destination this past year with 26 percent of all foreign purchases taking place here.

Are Acquisitions Properly Structured For U.S. Tax Purposes?

The question, however, is whether these non-U.S. purchasers are properly structuring their U.S. real estate investments from a U.S. federal income and estate tax perspective. For income tax purposes, U.S. real estate generally is the only type of capital asset that a non-U.S. purchaser will be subject to tax on. If the real estate is not acquired in the most efficient structure, the non-U.S. purchaser could be facing an income tax liability in excess of 54 percent on a sale of the property. From a U.S. estate tax perspective, U.S. real estate held directly (or through certain types of flow-through entities, such as limited liability companies) could be subject to U.S. estate tax at rates as high as 55 percent beginning in 2013.

Another issue that needs to be considered is how a non-U.S. purchaser could efficiently repatriate any profits earned on the eventual sale of U.S. real estate back to its home country without triggering further U.S. withholding taxes. This issue becomes increasingly important when the non-U.S. purchaser is from a jurisdiction that does not have an income tax treaty with the United States, such as Brazil and Argentina. While a number of strategies are available to eliminate U.S. withholding tax in this situation, if the initial acquisition is not properly structured, it may not be possible to implement these structures later on.