GI31: Tax Implications When Foreign Investing in U.S Real Estate with Olga Vodolazschi

GI31: Tax Implications When Foreign Investing in U.S Real Estate with Olga Vodolazschi

Olga Vodolazschi spent her formative professional years in the mergers and acquisitions department of a Big Four accounting firm, after which she moved to a mid-size advisory and accounting firm to focus on the private client side. Here, she guided high net-worth individuals, entities and families of diverse backgrounds from all over the world.

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Announcer: Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles: Welcome to another episode of the Global Investors Podcast. I’m your host, Charles Carillo. Today we have Olga Vodolazschi. Olga spent a number of years in mergers and acquisitions department of a big four accounting firm. She then moved to a mid sized firm to focus on high net worth private clients from all over the world. In 2017 she joined her current firm in Miami, Florida as director of international tax and advises her clients on all aspects of US tax compliance, specifically in regards to real estate. Olga speaks English, Spanish, Russian, French, and Romanian. So thank you so much for being on the show, Olga.

Olga: No, thank you so much, Charles, for having me on your podcast and I’m wanting just to say thank you to the listeners and to the viewers and then hopefully this will be a productive session.

Charles: Oh no, I bet it will be. I so I touched on your background briefly. Can you go in a little bit more depth about your background prior to starting with your current firm?

Olga: Sure. I’m so by profession, I’m actually an attorney. I’m licensed then New York state and in Florida. I did start my career and one of the big four accounting firms and KPMG in mergers and acquisitions. After spending some time there, I actually wanted to move to smaller firms because I’m a true believer that, you know, professional expertise and client service go hand in hand. And I think that, you know, in smaller firms you can dedicate more time to that. Then, you know, it’s not just about giving advice to clients, but it’s also about making them feel that they are, you know, well-guided that they’re always well service. Then sort of, you know, that they’re always a phone call away for your clients for any additional questions. So that’s how I moved into a smaller firms. And eventually as you mentioned before, I’m currently a partner at Lopez Levi Lowenstein Glinsky, which is an accounting and tax advisory firm in Coral Gables, Miami, Florida.

Charles: Okay, awesome. So getting into it what are various federal tax rules foreign investors should be aware of before when investing in us real estate?

Olga: Hmm. Right. I think within spend quite a few podcasts and that it’s a good, quite of a comprehensive question. So, you know, just give the bare bones and just the few, a few snippets of what international tax before and investors is all about. But think the first, the first sort of question and the first thing that any investor needs to understand is what is the scope of the investment? Is it long term? Is it short term? Is it in the commercial property? Is it in the you know, personal residence? Is it just him, her with his family or are we talking about corporate investors? So I think the important part is sort of to understand the framework of the investment. And then of course you understand all the tax implications. So as a general concept is that the United States has the worldwide taxation system, right. For the US tax residents. So while we have the US tax presidents in one side, then we have the non-residents, which would be our typical foreign investors that you are inquiring about. So the foreign investors are only taxed on what is called US income in the US, right. Meaning we can talk about rental income rights. We’re talking about real estate or it’s capital gains upon the sale of the sad real estate property. So that, that is sort of the main concept to keep in mind that you are source income when we’re talking about non resident alien. So what would be the, taxpayers who are not green card holders who are not passport holders, US passport holders and who do not exceed a certain amount of base in the US in order to become tax residents. So you know, I don’t want to confuse people more than that. So I think I’ll just, I’ll stop with that. When it comes to what is the sort of the main way how foreigners can be taxed. It’s on all of their US source income that is being generated within the US.

Charles: Now for foreigners that are selling real estate, there’s the special withholding. Can you go into it a little bit more about that?

Olga: Right. So I believe you’re referring to what is called FIRPTA, which is the specific withholding for foreigners convoluted super bladders. What it stands for is Foreign Investment in Real Property Tax Act. And you know, I always like to put in the sort of, in the framework for clients what this Roseau about, where they came from. So it was passed in 1980s and based they will happening is that foreigners from and they will, I’d be accountable for taxes and I would just leave to there then accountability mechanism that the IRS want to turn over. [inaudible] came up with. Rule again, there are various exceptions, various rules, but the general concept is that when a foreigner, whether it is a, an individual, whether it is a corporation or whether it is partnership where there is a trust all of that is well the foreigner so on the foreign there is a 15 percent withholding on the fair market value of the property. So that is a, that way, you know, upon the sale, the 15% is held by IRS and then the foreign, I would have to buy with tax return in order to get back the refund because their tax might be much low and then that 15% that was would held by the IRS. Yeah. This is just the general rule. There are a lot of exceptions or a ways to minimize this withholding. You know, prior to the closing of the transaction there are various provisions that would not even apply. If you again present the case to the IRS but just it’s something to be aware of as this rule exists. And in often cases, you know, foreigners a little bit apprehensive of this, but at the end of the day, it is just an accountability process. It is not an additional tax. That is what I always like to tell my clients that it is not an additional tax and it’s just the tax, like all the other you know, us residents as subject to when they sell a property, they have to pay tax on any gain.

Charles: Interesting. Yeah. So they would have to file a tax return at the end of the year and possibly get back whatever is owed and whatever they actually was not owed to the government.

Olga: What they sort of overpaid for that with coding.

Charles: It’s awesome. So, how do you decide what entity structure is correct for foreign investors when developing a plan to invest in the US say there, I know there’s so many different nuances. Say they want to purchase a commercial property or apartment building.

Olga: Mine. So I guess we’ve gone back to what I mentioned. You know, a few questions before. It is important if, you know, if we’re talking about a personal property, I mean is it a family that is purchasing for short term, is it something where they plan eventually live in, they plan to move to the West.

Charles: It would be forest. Yes. It’s a strictly an investment property that’s probably done by one or two one or two people and they’re forming a company and or they want to form a company to purchase this said commercial property, residential complex, something like this.

Olga: Right. So you know, if it’s, if it’s for investment, obviously is never advisable to purchase it in personal name. You know, not even from tax point of view, but just talking from corporate point of view, just for liability purposes. So there’s always some need for structure. Then you know, the, just as, as again the bare bones of entities in the US if some foreigners are aware of, you know, I like typical LLC, which is in the US which stands for limited liability company. Then what foreigners need to understand is that that if that LLC has on the one owner, it is treated as a disregarded entity. What does that mean? That if they buy a property in the name of that company and if the generates rental income, that income flows up to the investors. So you know, he or she or they would have to file a tax return in the US. Right. Or if that LLC has at least two owners, then it is treated what we call in the US a partnership. Again, all of the items of income that are generated at the level of the LLC would flow up to the partners and then they would have to they would have to report whatever income is generated on their personal tax return. Obviously another point that foreigners have to take into account when we’re advising about structures is the concept of estate tax. Because in the U S it is quite of a you know, quite of a high rate in the event of that, on the part of the investors they stayed tax in the US is about 40%, and foreigners only have an exemption of 60,000. So and the, you know, and it’s 40% on the fair market value. So assume it to typical, you know, if we just stay five a hundred thousand or a million property, you know, simple condo somewhere in Miami during the math. And, and it quite becomes quite pricey. So, you know, in a lot of cases, the most typical structures, obviously to put on a foreign blocker because in that case if the investor unfortunately passes away with any US property he was, she or they not perceived to have any U S assets, but what they perceive to have his shares of a foreign company, for instance. But again, there’s sort of a lot of other structures and you know, it’s very case by case. So you know, I just don’t want to generalize. So just a few snippets of what structuring is all about.

Charles: Yeah, no, it’s just good to get in a, so people who will have an idea of, so when they’re speaking to a professional, when they’re speaking to they’ll have an idea of questions ask and they can get that all sorted out for them, whatever. Obviously every person’s a state and every person’s invest in structure is going to be a little different. One thing we have is we have we have some listeners that are syndicators, so they’re grouping money together and they’re purchasing rental property, mainly multifamily commercial properties in the United States. And they’ll have foreign investors that come in and I get asked this question a lot and they’re always wondering if they have foreign investors and they’re going to be paying out. You know these people normally like for a U S person they’d be getting a K-1 even for I guess international person, they beginning to K-1. Do the syndicators the general partners, if this person is a foreign investors eliminate partner, the general partners have to withhold for that. They’re going to have, is that a requirement they have to withhold for that limited partner if they’re based foreign?

Olga: Yeah. So usually any yours you ship if it has foreign owners? Yes, the partnership has to Recode on the foreign partners. And how the recording happens is that it occurs at the highest rate of the partners. So let’s say if the foreign partner comes in through a foreign corporation, right then the wood holding at the partnership level would happen at the corporate rate at the highest corporate rate. If it’s, if it’s an individual investor than the U S partnership would, would hold at the highest individual tax rate. And then when the partners receive what you just mentioned in the [inaudible], which is the form, whereas reflected the partnership interest and the items of income that are associated with that partnership interest, then the partners have to file their tax return and if their actual rate is lower than that highest rate that the U S partnership with how that they can get a refund back or they will just have to pay additional tax. It sort of depends. Case case by case, but as a general rule, yes. U S partnerships have to look forward if they have foreign partners.

Charles: Yeah. Pretty much. Same thing with the FIRPTA is that the government doesn’t want to be going. It doesn’t want to be going offshore looking for money. They’re going to withhold all of it and then they have to, that foreign investor has to come back and kind of prove to them with the tax return that this is an owe to me and there’s probably a ton of depreciation, especially when we’re talking with the this type of properties. So there might be an instance when they own, they owe very little or none at all. So which is, which is awesome. One of the questions I guess with the ITIN and I wanted to kind of go through the process. I know you guys probably will fast track that for different investors that come to you. Can you explain a little bit about the ITIN and the process takes and why someone would need that if it’s their first time investing in US real estate.

Olga: Right. So you know, we can take the example of FIRPTA that we already discussed. So let’s assume if a foreigner or a foreign investor has a property in the U S but it was never rented, right? They never had to actually present a tax return in the U S and then they would like to sell this property. So when they sell the property, they have to include their tax ID on, on the various forms that are associated with the Ferb, the process, right, with the withholding or, or if they, once you request the loan withholding prior to the closing. So what happens is that you have to present you applications. One is for the is for the FIRPTA and the other application is for the, for the tax ID. So you know, it’s a fairly simple process. The application itself, it’s just waiting for the tax ID can take longer and it doesn’t mean that you have to obtain it prior to, for example, filing your first application. You know, you would need the, the typical documents. It’s a certified passport copy. If the client is here in person in Miami, they would just come to your office and they would certify that, you know, we saw the passport, we saw the client, we know who that, you know, both match. Right. but if, if the client is not here, then we obviously have to request a certified copy from the embassy in their jurisdiction. So having the document and then you know, the supporting documentation of FIRPTA, for example, your mail that packaged your IRS and then would basically wait for the approval. So you know, that, that’s sort of how it goes. But the important, they want, one important point that I wanted to mention that sometimes our clients are so confused is they would sometimes call and say, I would like to apply for a tax ID. And the question is why? Well, because I think I might need it in the future. Well, it doesn’t work like that. You need to have a reason to apply for a tax ID. So it’s either I need to present a tax return. I have got the File for application. I need you, you know, get a refund back. There has to be a reason. You cannot just apply for tax ID just because.

Charles: Yeah. Well is it true then that if I’m foreign and I’m coming in saying buying a condo in Miami for cash, do I need to have an ITIN at that time or is it just gonna be, if I’m, when I’m going to sell it and there’s going to be some sort of income, let’s say I made something on it, is that the time when the item would be required?

Olga: So if you buy, you know, if you are the foreign investor and he would like to buy [inaudible] company for example, for an LLC that we just discussed a few minutes ago. Yeah. Then that MI needs to apply for tax ID. Yeah. Because eventually you would like, you would like to open the bank account, I assume in the name of that LLC, if this is a resume, if this is a investment property and you would like to rent it then that LLC, so the steps would be the following. He opened you open a company and I will see you close the property and the name of that LLC, you apply for a tax ID for that LLC. And then you open the bank account in that LLC and then you can start renting the property.

Charles: Okay. So same basic process that a US investor would use for doing it. Obviously not having the, not requiring the ITIN cause we already have a social security number, but obviously they can just reach out to you and you could walk them through the process of what they need or what they don’t need. It’s like you were saying you need to have a reason for applying for the ITN show. What do you suggest the best to the first steps for a foreign investor take before investing in the US as a to come and talk to a CPA, talk to a tax attorney before buying real estate, if it’s personal or for investment.

Olga: You know, I think the best client is the well-informed client, right? That’s, that’s what makes you know, a good decision. So I would suggest to talk to the real estate agent. I need to talk to a corporate attorney to talk to a tax attorney you know, to talk to accountants, tax accountants. And then also if, if down the road that investor’s thinking of potentially moving to the us, maybe it’s a, you know, maybe they will be looking at an investor visa or they would be integrating with their family also to involve in immigration attorneys. So I think the more information the client has the better decision he or she or they will make. So, you know, we, we always, I mean the policy of our farm is to give a complimentary consultation the first time we meet a client. Because I, you know, we truly believe that it is important for the client to understand what they’re getting into before you know, investing in the U S or sort of committing to something. So, so definitely discussing with several experts [inaudible] and that is, that would be my best advice.

Charles: Yeah. So what services does your accounting firm provide? If you can just go through them? So people have an idea other than everything that we explained here. The ITIN what additionally?

Olga: Yeah. I mean the idea that is just one, one small part of what would you you know, in addition to you being a purely accounting firm that when we offer compliance services, consulting and tax advisory firm, which I think is a crucial distinction with a lot of other accounting firms. You know, when we meet the client, we want to understand the structure that they have, whether it’s already here in the U S or if it’s in their local jurisdiction or wherever else in the world in order to be able to advise on us tax concept. So once we advise the client from sort of structure, from, from tax point of view, then we can move into the implementation side where we, you know, we help with filing the tax returns, preparing the accounting and so on and so forth. So in terms of services, you know we help with, of course with all the real estate structuring, if the client is considering buying some business in the US we offer as well due diligence services. In the real estate arena. We also assist with cost segregation studies. If we’re talking about commercial properties, which is again, probably topic for another podcast. You know, with business valuations property valuations, I mean way we really truly try to offer a holistic approach to, to every client to offer the best service. And so they can be well informed and well from all aspects.

Charles: That’s awesome. So it’s definitely full service firm. And where can, Olga, where can they learn more about your firm and yourself?

Olga: Sure. So they can definitely look us up on our website, which is lllgpa.com Lopez Levi Lowenstein Glinsky. And they can find out information there. And we’ll be happy. We’ll be happy to assist everybody.

Charles: Okay, great. Yeah, I’ll put all the links in the bottom for the podcast and for the YouTube video. So I wanna thank you for being on the show today, Olga and have a great rest of your day.

Olga: No, thank you so much Charles. I appreciate it and thanks for everybody’s time on this podcast who was watching and listening.

Charles: Thank you.

Charles: Hi guys, this is Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in investing in real estate and you don’t know where to begin, set up a free 15 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com.

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Announcer: Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of harborside partners incorporated exclusively.

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About Olga Vodolazschi

Olga Vodolazschi spent her formative professional years in the mergers and acquisitions department of a Big Four accounting firm, after which she moved to a mid-size advisory and accounting firm to focus on the private client side. Here, she guided high net-worth individuals, entities and families of diverse backgrounds from all over the world.

Ms. Vodolazschi joined Aptios in October 2017 as Director of International Tax. She advises individuals, families and businesses on establishing their presence in the U.S. and on the relevant U.S. federal tax implications and compliance. She also assists with immigration planning, real estate structuring and estate planning.

Ms. Vodolazschi holds a Bachelor of Arts from Skidmore College, a Juris Doctor (J.D.) from Seton Hall University School of Law and an LL.M in Taxation from the University of Miami School of Law. She is currently licensed to practice in both Florida and New York.

As a leader in our international practice, she offers her services fluently in five languages – English, Spanish, Russian, French and Romanian.

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