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Global Investors Podcast
GI82: Navigating U.S Taxes When Investing in Real Estate with Lance Lvovsky
January 13, 2021
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Lance Lvovsky is a CPA based in Florida. Lance’s expertise includes tax planning and tax compliance services to foreign investors in U.S. real estate, cross-border transactional tax planning, and estate tax planning.

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Transcript:

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 Lance Lvovsky. Lance was on episode GI6 so you can refer back to that if you want more information but; Lance is a CPA based in Florida and his expertise includes tax planning and tax compliance services, mainly to foreign investors in U.S. Real estate, cross-border tax planning, and estate tax planning. So Thank you so much for being on the show!

Lance:
Thank you so much. I’m happy to come back and I look forward to another great episode with you.

Charles:
Thanks. Yeah, we had a, it’s a lot’s changed over the last year and a half, I think was the last time that you were on

Lance:
The world has changed the tax law landscape, certainly evolve. Then I think it’s fair to say it will continue to evolve in the coming year and a couple of years as well. Yes, absolutely.

Charles:
So what was your background prior to working with your current firm?

Lance:
My background, I started with a, another accounting firm. I started with RSM, they’re a large national accounting firm. I wasn’t in their private client services practice and I joined Markham just over two years ago. I want to say about two years and three months give or take and a little bit about my current firm and Mark and we are a national accounting firm and I do oversee in the Southeast region, our estate gift and trust group. And I help lead up our tax consulting group within the Southeast region at my firm, which does encompass all of Florida, but we’re also brought in by CPAs and Martin come from other offices in other regions as well for assistance when needed our international tax practice and our state and local tax practice. Also both they’re both headed up and out of Florida. So we’re, we have a very robust and, and a very deep bench if I may say so of tax experts in my office.

Charles:
Okay, awesome. So it pretty much covers the whole spectrum of any type of questions in regards to your County.

Lance:
Yes. Hopefully we may not always have all the answers at the top of mine, but we can always get all the answers that’s key.

Charles:
So a question I get often is when a new investor, a new foreign investor reaches out to us and they kind of, they want to start investing. They don’t know how about, how to go about it. Can you give us a little bit of an overview of the process to set someone up, whether it’s, if they want to do it personally, if they want to do it through an entity to, to invest, like what were their options and what, how would you normally suggest them to go about it?

Lance:
Sure. So when a new foreign investor first reaches out I generally ask a series of questions and of course that would include what, what country they’re from the States does have income tax treaties with many countries. And we have estate tech treaties with, I think only about 14 countries, but income tax treaties with most countries out there. We do. So it’s important to understand what, what your citizenship is, which countries you’re a citizen up, but also which countries you are a resident of for tax purposes. And I also want to know how much capital you plan on investing in the U S because if an investor tells me they plan on putting 50 grand in the U S compared to let’s say 5 million, my recommendations will be different because I always tell every client or prospective client, you have to take into account the cost of professional fees. And those professional fees, namely include legal and CPA fees, right? Paying someone like myself, and then, and then attorneys and for a $50,000 investment, it’s not necessarily in a client’s best interest to undergo the same type of planning as someone that might be making a $5 million investment in the United States with respect to what options an investor has. So I’ll kind of go down the list briefly, I don’t want to do all too much on any one option, but an investor can certainly invest in their personal name to do that. They would need to obtain an ITIN, which is a, an, a tax ID number for, for taxpayers that do not have a social security number and getting an item. There is an application that gets submitted with the IRS on a form w seven and supporting documentation does need to be submitted such as a certified copy of a passport and other documentation. So the IRS can validate use you are who you say you are. Your other option of obtaining an item is to go through what’s called an IRS certified acceptance agent, which actually my firm, we are a certified acceptance agent, which what that does is it streamlines the process for a foreign investor. Because what we do is we actually get on a Skype or FaceTime interview with the client. We do the certification, we certify the passport in house, and we send all the documentation to the IRS. What does this mean for the investor? Well, really two things. The turnaround time is cut in half generally when you’re not going through a certified acceptance agent, you can expect to wait anywhere from three to four months to get that tax ID number, which, and I don’t want to jump around, but this is important because if you’re planning on investing tomorrow, you can’t be speaking to a CPA today because it’s not going to happen. You need sufficient time and you need to be reaching out to your CPA several months in advance, at least getting back to the benefits. So I said, using a certified acceptance agent, you do cut the time in half. We have a much quicker turnaround time that is less than the three to four months, but in my opinion, the more, the even more attractive benefit is that the foreign investor gets to hold onto their passport. No one wants to let go of their passport, having to mail it overseas to the IRS. It’s it can be worrisome. In some cases, the IRS will allow you to go to your local embassy or consulate to get it, to get certified and, and, and so forth. But, but still that requires additional work on your part. So I do recommend using a certified acceptance agent when possible. And when you invest in your personal name, did you have to file annual income tax return? It’s on a form 10 40 and R and there could also be state income tax filings, the other options, or one of the other options I should say is utilizing a us corporation. If a us corporation owns the asset in the United States and a foreigner in their individual capacity is the owner of the U S corporation. That’s an option. A third option is a foreign corporation, owns the shares of the us corporation. And I’ll get a little bit more into this later on, but this is generally one of my recommendations for investors that are putting in more capital in the United States. And yet another option is to use a trust. And with trust you have us trust, or you could afford a trust depending on the client’s goals and wishes. Sometimes I recommend they set up what’s called a foreign irrevocable trust in order to escape the United States, the state tax. And I don’t know, Charles, if you’ll be asking more about that, or if you, if you’d like me to get into these state tax regime now and happy to do so as well.

Charles:
Yeah. If you don’t mind touching on that, cause that’s something that differs greatly between us investors and foreign investors.

Lance:
Yeah. I’m happy to do so. So us taxpayers or us individuals, I should say that are a United States citizen. Our, we get to gift away or die on their current law about $11.5 million in assets. So most individuals will never have that much in assets and they’ll never pay the estate tax. The state tax is think of it as a death tax because that’s truly what it is. And it is truly a double tax assessed by the United States government. And it works together with the gift tax regime. They go hand in hand, as a matter of fact for us persons, they are what’s called it’s a unified credit and they move up and down together. Again, this is under current law. You’ll hear me continuing to say that because we do have a new administration coming in and this episode is being recorded December of 2020. So just keep in mind that there will be a lot of political changes in the United States in this next year. And I’m sure there will be more changes within the next two to four years as well in our Congress, which ultimately set the tax loss. But if you’re a non-resident alien, which is the term that the government refers to, when you’re a foreign investor, you don’t get to die or gift away with $11.5 million. You actually, your exemption is actually only $60,000 and on all of your United States, Situs assets at death as a foreigner will be subject to a 40% estate tax over and above $60,000. And that’s huge because you could just buy, you could have a foreigner that is not interested in investment, and they just want to buy a condo in I’ll use Miami as an example, because I’m so, so close and they buy a condo as their second or third home, wherever the case is more often than not, no one even tells them about the U S estate tax and a nice condo in Mandy. You can easily be a million plus and lo and behold, at some point, if they’re lucky enough, a tax advisor might actually tell them, Hey, you have an estate tax problem. If they’re not lucky, well, their family, their beneficiaries have to come up with substantial cash. When that owner, the foreigner passes away, because that is a 40% tax and it is due within nine months. And the last thing you want is the family to have to liquidate assets, to pay a tax bill.

Charles:
Oh, that’s, that’s crazy. That’s a huge, a huge a huge difference in what can happen if you, if you haven’t planned correctly. I, you, you, you talked a little bit about the new administration and obviously nothing’s in stone. We’ve only heard, I imagine you’ve been speaking to some of your clients and to be aware of certain changes, anticipate changes. Can you give us a little overview of what you think might change with the new bylaw administration versus where, what was happening with Trump?

Lance:
Yeah. I’m happy to do self, so let me first share that as it stands today, we still do not know who will control the Senate. And the Senate control is extremely important, ultimately in any tax law changes, because remember it is Congress that that sets the law and the president will of course supported and sign it when they’re in agreement. I believe it’s January 5th of 2021. When we will know who controls the Senate. If the Democrats win the remaining to run off seats in the Senate they will have control by means that our future vice president, current vice president elect Paris, she will have what’s called a tiebreaker vote in the Senate. And presumably the Senate and the house Democrats would work together with the new white house administration in passing tax law changes. There is a lot in Biden’s proposals. When he was running, I will say a lot of it is not super specific, which is very common when presidential candidates are running. They don’t put too much detail as to tax law changes, given the layers of complexity, but also given that the government, when new laws are passed, they must meet. They must meet certain revenue requirements within the federal government. And it has to reconcile with the United States budgetary and so forth. So there’s a lot of additional layers that go into it, but it, one of the things that I believe he will change is the United States corporate income tax rate, which under Trump was reduced from 35% to 21% Biden’s proposal, I believe calls for a 28% corporate income tax rate. So it seems like he kind of wants to, he wants to meet halfway. I think that would be one of the measures that is more likely than not to change. And as foreign investors, when you’re speaking to your tax advisors as to possible structures, you know, it’s frequently when I’m speaking to clients, I explained to them, you could form a us corporation, would that foreign corporation blocker. And of course you have the corporate income tax rate, or you could be investing in a us LLC. Directly, generally, I don’t recommend that if there are substantial assets because of the United States estate tax regime, or you have the foreign irrevocable trust, or it could be a U S trust as well. But again, that’s a us trust them. The us trust will likely be subject to these state tax, but when you’re comparing tax rates under current law, the corporate income tax rate is 21%. The highest individual income tax rate is 37%. But remember if you’re a C corporation and subject to the corporate income tax, there is a double tax in the sense that when the dividend is paid out to the owners, there is a second layer of tax, which could be up to 20% as a matter of fact. So effectively you are looking at a slightly higher, slightly higher tax rate. I think that if the new administration changes the corporates at 28%, I think we’ll see more people carefully considering whether the U S corporate structure is correct for them. The other thing that he will be changing are those individual income tax rates. So for investors, when you have rental properties, generally speaking, when you own a rental property, it’s D there there’s two types of tax classifications for foreign investors. There is what’s called fixed determinable annual and periodic it’s called [inaudible]. And I generally abbreviated as that believe, I recall what F dab actually means. So forgive me if I don’t. And the other kind is called effectively connected income, which we abbreviate as ECI much easier to remember F DEP when you have a rental property by default, it’s generally considered F debt, and you have to pay a 30% tax on the gross rents, very, very unfavorable tax treatment to the investor, unless your us activity rises to the level of a trade or business in which it becomes effectively connected income to a United States trader business. And you get to be taxed the same as a us resident or a us citizen where your taxes, our marginal income tax brackets and the brackets do do change a lot. I think under in 2020, for example, if you’re a single taxpayer, the highest bracket doesn’t kick in to about four 20 or $450,000 of taxable income, and that highest bracket is 37%, you could be in the lowest bracket, which, which is 10% if I recall correctly. So there, you generally, when you’re buying a couple of rental properties, you are likely will be in the lowest tax bracket. You may not even be in a tax bracket because after depreciation, you might not be have a taxable loss, even though you’re cash flowing positive, but I bring this up because I do think that one of the things that he will change is that highest rate, which is currently 37% Biden, does want to revert it to the pre-Trump era highest rate, which was 39.6%. So we’re looking at about a 3% rate differential. Now, Charles, you and your listeners might say, Hey, Lance, most of us are not in that bracket. This will not affect this, but here’s the thing. If he reverts to the pre-Trump individual tax rate changes, the brackets will actually become more compressed. And what I mean by that is more income will be taxed at higher marginal rates because the tax cuts and jobs act, which was passed at the end of 2017 effective for 2018 under the Trump administration and the Congress back then they expanded to the tax brackets. So where you could most clients, what they would have is their higher levels of income were taxed, lower brackets because the brackets were expanded. That actually helps a lot of people. The other thing that I think will be changed because it’s in Biden’s current proposal is the 20% qualified business income deduction. And I know we don’t have time for me to get all the details and mechanics. It’s an extremely complicated area of the tax law, but generally speaking, when you’re a us trade or business in rental property, assuming you qualify, you get what under code section one 99 cafe, a 20% deduction. A lot of my foreign investors come to me and they want to invest in other people’s deals as an LP. And frequently that LP at the partnership level might qualify as a qualified trader business. And that 20% deduction is passed through the beauty of this deduction is that the determination is made at the partnership or entity level, not at the individual level. So what I’m saying here, Charles, if you have a listener and they want to put in, let’s say, let’s call it a hundred grand into a deal, and they just want to be an LP and LP, meaning a limited partner.

Speaker 3:
They’re not interested in acquiring the assets themselves, whether it will be you know, a raise of capital. So for phase one, to enter someone else’s deal, if that deal at the partnership level qualifies for the 20% deduction, the determination is made at the partnership level, and the deduction will actually be passed out to the individual and a foreign investor would qualify for this because the partnership is a us trader business Biden’s proposal aims to limit this deduction and his proposal. He doesn’t say he wants to get rid of it entirely, but he does want to limit it. And I think compresses the right word, compressed the eligible taxpayers foreign investors that would receive this 20% deduction. So I know, you know, and I can continue going on. I don’t want to necessarily do that. I know Charles I’m on a time limit, so maybe

Charles:
Yeah, no, that’s perfect. I want to dig into a couple of different tax questions that are that you typically typically receive in regards to common deductions, which I imagine is something of interest to foreign investors, but also us investors. Can you give us a little bit give us some examples of common deductions that people can deduct against their gross rental income.

Lance:
Absolutely. and this is something that needs to be factored in and carefully considered when you are doing your planning and you’re planning to make your investments in the United States. And this would apply when you are not in investing as an LP, right? Because if you’re investing as an LP, you’re only getting, what’s called a schedule, K one. If you’re going to run the deal and own the asset, whether you’re owning it in a corporation, a trust LLC, you want to understand what you can deduct and you can deduct all business expenses against gross rents. The most common deductions are local real estate taxes, state income taxes. And I will get back to these first two in a second insurance. So you should have hazard insurance on the property that is important. Depreciation is not, is not a bank expense. It’s, it’s a paper expense. And what I mean by that is you’re not actually cutting a check to anyone for depreciation. The government allows you to depreciate real estate with the understanding that listen over time, a building a house, a warehouse, et cetera, there will be some level of wear and tear, and you actually get to depreciate over a certain time period, the purchase price. So if you spent a million dollars on a warehouse, you can’t expense it in full in your lawn, but you can’t appreciate that warehouse. And so every year on your income tax return, you’ll have depreciation expense. If you’re buying a condo frequently, condos have HOA fees, those are deductible. Let’s see. I think I caught if there is commissions. So when you’re entering a transaction as a buyer, it’s very infrequent that you’re paying commissions. It’s especially here in Florida. Most of the settlement statements that I review in Florida, but also for other States as well, cause that clients investing in all in all States it’s usually the seller that pays the commission unless they’re the seller and a buyer negotiate otherwise. But those would be the most common deductions. I think I hit on all of them. I would also say landscaping. So if you have a house you know, you and you’re paying the landscaper or pest control. So any type of maintenance expense is deductible. And, Oh, I forgot the most important thing. Accounting fees, right? Paying accounting fees is a tax deduction against your gross rents as well. And this will apply to other professional fees, including legal fees as well. Now, Charles, if I can quickly, I want to go back to items one and two, I mentioned real estate taxes and state income taxes. We have under the current tax law, there is a cap it’s called a salt cap, and this is an assault on found on the table. Salt stands for state and local tax. There was a cap that you can own and deduct $10,000 annually against your eye on your income tax return of state and local taxes. But if you have a trader business or an investment property, this cap does not apply with respect to those taxes. So if you have our rental property, I’ll pick on New York, New York has high real estate taxes and has a state income tax system. It’s very easy and very quickly for a client of mine who’s in New York or, or investing in New York to exceed that $10,000 between the real estate tax paid to the state of New York and the state income tax and potentially city income tax that it will be fully deductible, assuming it is treated as a trader business or an investment property.

Charles:
Interesting. Yeah. That’s one thing about the state income tax. So it’s that important of a, a factor for an investor here to consider before they’re making a decision to invest in a certain state?

Lance:
Absolutely. one of the things and, and Charles, you may be asking me, so I forgive me if I’m jumping ahead, but when investors come to me and they’re seeking tax advice, in my view, my job is also to help them understand the other, the, the other non-tax issues. The state, the States surely a state income tax issue, but it becomes a cashflow issue. You need to understand that if you’re going to be a, co-op acquiring a piece of property in California or New York versus a state like Florida, your cashflow may change, and you need to understand what that state income tax will be. And also what your filing obligations will be. The more States you’re in, the more, the more spread out your U S assets are the additional filings you may have. And this is important because what every additional state income tax return filing, not only is there the tax, but there’s also the CPA fees. And I say this to my clients again, you have to account for, for paying me, right. Or whoever your CPA is because the more work there is the bottom line is there will be additional time spent in the file and that will increase your accounting fees. And that’s important to take into consideration accounting fees when you’re planning on making an investment in the United States, it should be part of your business planning.

Charles:
Yeah. Yeah. The other thing too, is that we always talk about on the show, a lot of scale of economy, scales of economy, and that’s kind of, you know, buying all your real estate in one area, you can get deals on your management, all your other vendors. And this is another sector too, is that on your taxes as well? It’s something that you can minimize your fees if you’re locating you’re, you’re really targeting one location for your, your investments. So that’s a, that’s a great point that I wasn’t even thinking about. Cause that’s being down here in Florida, we don’t have to pay those state income taxes. So,

Lance:
Right. Absolutely.

Charles:
So I want to just kind of a couple of questions here to follow up. And I know I presume that a lot of or some of your U S and foreign clients have actually lost money when investing in real estate in the U S not just paper losses, as we were talking about before with depreciation and these situations, what mistakes do you commonly see your clients making or mistakes that they had made in, in previous transactions,

Lance:
The most common mistakes I see is not doing their due diligence. They get proforma numbers from the sell the asset, and they take that as face value. And lo and behold, once the client becomes the owner of the asset, they see that expenses are not what they were on the performance. They’re much higher. The property is not in good condition, requiring extensive rehab work. Those would be the most common not take into account. Also all of your expenses that, that are required into maintaining a real estate, a real estate while is a fantastic asset class. It does require upkeep, upkeep insurance, the payment of professional fees, property taxes, which depending on the state urn can be higher or lower. And so the bottom line is it’s important to project from a cashflow perspective in advance, what you anticipate the deal will truly return to you what your ROI will be and what will be back cashflow on a monthly and an annual basis. I would say most of my foreign clients that come to me, they want to, they, they generally are not looking to invest in a us and exit within a couple of years. They’re looking to stay in the, in the U S investments, I should say for a while and grow their us portfolio. And this could be for a multitude of reasons, perhaps in their resident country. The political system is more volatile. Us real estate real estate is considered a great asset class for many foreign investors that recite in countries that perhaps are not as I, I don’t want to say as stable as the U S but let’s just say don’t have the same, the same level of certainty in the United States at the end of the day, the United States as a proud American, I don’t think the United States will be going under anytime soon. So there is that level of certainty and comfort investing in us assets.

Charles:
Yeah, no, for sure. And the other thing too, is I always see is that people aren’t looking at the actual numbers, like you were mentioning your property taxes is always going to differ from what you are purchasing it at. So that’s another thing that’s a major change. I always see with any type of investors, us, or foreign. So it’s really, and if you’re not sure of the qual, the condition of the property, make sure you have inspections and pay for someone to go out there with you. That’s an actual license contractor, license, a vendor in whatever you’re worried about there being an issue with, to go out in that field and to actually review the property and pay for it because some of your best deals are going to do are the ones you don’t. Right?

Lance:
Absolutely. No. And those are great points. Get an inspector out there. That’s an excellent point, Charles. And the other thing I’ll add, I’ll have some as a bonus tip for your listeners. If you’re buying, if you’re buying residential property, you need to be careful because if the S if the seller was living in it, they may have had, what’s called homestead exemption. And where I’m getting at is their property tax bill may have been, may have been lower under state law. And, and again, I know I’m on a time crunch, but very, very quickly in Florida, for an example, we have really fantastic homestead laws where property tax increases cannot go up more than a certain percentage on an annual basis. If you’re buying a resonance from some of them, Florida, as an example, and they have owned that property for many, many years, and you might even go to the County tax collector and say, Oh, the property tax bill is only $5,000. You need to be careful because when you buy that property, the County will reassess the property at its current value. And that property tax bill can go from $5,000 to 10 or 15 very quickly.

Charles:
Right. And you can check the property card when you’re in the office. They’re not going to tell you what it’s really going to go to. We’ve probably any certainty that might be something that you’ll have to speak to your broker about, but they’ll tell you the deductions that are on there. So you can actually see what you’re getting yourself into. And if there’s a lot of deductions, if they’re a veteran, if they’re this, or they’re that homestead like Lance was saying, these are all different things that you know, you have to take into consideration. So how can our listeners learn more about you and your firm lands?

Lance:
My contact information will be provided, I think, after the show, if I’m correct. So.

Charles:
We’ll put into the notes for the podcast and the YouTube notes.

Lance:
Okay, fantastic. So feel free to contact me. I’m always happy to get on a, on a call with, with your listeners and you know, and, and I just want to conclude a little bit more about my firm. We are a national accounting firm with about 30. I think now we have 39 offices across the country. We also have a couple international offices and we’re a member of an international Alliance of accounting firms. So I actually can work with accountants in people’s home countries, and I have access to them and so forth, but we are a full service accounting firm any kinds of domestic issues, international tax issues, state, and local tax estate gift and trust tax matters. We are able to fully, fully help our clients. I bring in subject matter experts from these various areas all the time. And like I said, I’m happy to get on a consultation call with, with anyone to discuss what they’re, you know, to discuss how we can help them. And the initial call is always free of charge.

Charles:
Okay. Well, great. I will put your links into the show notes. So look for those, if you have any questions and you can contact Lance, I think I have is it’s going to be his email address, phone number and his website. So thank you so much for being on the show today and looking forward to connecting with you in the near future.

Lance:
Awesome. Thank you again. I appreciate it.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
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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 Syndication Superstar incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

About Lance Lvovsky

Lance Lvovsky is a CPA based in Florida. Lance’s expertise includes tax planning and tax compliance services to foreign investors in U.S. real estate, cross-border transactional tax planning, and estate tax planning. Lance advises clients in areas such as business succession planning, real estate tax strategies; and the use of trusts, insurance, and entities to help preserve and grow wealth for future generations. A frequent speaker on tax law topics, Lance has also been the winner of several accolades, including 40 under 40 CPAs by CPA Practice Advisor and the Up and Comer Award by South Florida Business & Wealth.

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