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Global Investors Podcast
GI92: Understanding U.S Taxes as a Foreign Investor with Kenneth Kastner
March 24, 2021
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Kenneth is a US tax advisor specializing in real estate income taxation for foreign investors. He has worked with thousands of foreign investors who have invested in US real estate.

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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 Kenneth Kastner. Kenneth is a US tax advisor specializing in real estate income taxation for foreign investors. He has worked with thousands of foreign investors who have invested into US real estate. So thanks so much for coming on the show, Kenneth

Kenneth:
Pleasure to be here. Thanks.

Charles:
So I briefly spoke about your professional background. Can you give us a little bit more and expand on it, of what where you are now prior to getting to your current firm?

Kenneth:
Sure. but till about a year ago, I was the U S tax director of a smallest firm called GTS Israel. I had a staff of close to 15 people servicing those few thousand clients that you mentioned before. Most of them were Israelis who invested in US real estate. That’s really my focus. And about a year ago, that firm was bought out by a larger firm called UHY. And I stayed for the transition period for six months, and then I moved on to what I’m doing today.

Charles:
Okay, nice. So what is, what, what services do you provide, does your firm provide to its clients?

Kenneth:
So we provide every us tech service, essentially that a foreign investor would need from tax planning, obtaining an ITI en preparing all the relevant federal and state tax returns, dealing with FIRPTA. And we’ll probably get to that later on other withholding rules when relevant and any tax advice that they need in between.

Charles:
So there’s a, there’s a number of different parts of the U S tax code that might be a little different or might be completely new to foreign investors. And a few of them I kind of want to dig into and give people a little background of what it is and what they can expect and why they should get console when planning on investing into us real estate. But what type of tax and legal structure planning should be performed prior to investing in us real estate?

Kenneth:
Oh, there’s plenty of that. I personally like to educate the investors and most of them like to be educated so that they’ll know what they’re getting themselves into. I make sure to make it clear to them that I’m not a lawyer, I’m not an investment advisor and tax planning should definitely not be the only type of planning that they do before investing meaning they shouldn’t, you know, decide which state to invest in only based on the tax rates in each state, for example it could be that the best investment opportunity for them is in a high tax state and that’s fine as long as they’re aware of it and they don’t get surprised by it. After the fact, it’s critical to also understand the tax laws in the country of residence of the investor, wherever they happen to live, to avoid double taxation. So I insist that they discuss their plans with their local tax advisor as well. And there’s also the estate tax planning, which is significant for foreign investors.

Charles:
Okay. Interesting. Okay. can you go into a little bit more about we’ll go into a little bit about estate taxes and how it pertains to, to real estate investors. And I know there’s a huge difference between if you’re a us investor versus a foreign investor and kind of some work arounds let’s say of structuring for avoiding maybe a huge tax. It

Kenneth:
Absolutely. So first of all, obviously the first, the main, the main and most important thing is to be aware of it. Estate tax in the U S is also known as the death tax. And not only because you pay the tax when you die, but also because the state tax can be up to 40% of the value of your us estate at the time of death, but even more so for foreign investors, like you mentioned before, the reason is the exemption amount, us citizens currently have an exemption of around $11 million worth of assets before they have to start paying a state tax on, on any value that they have above that amount foreign people with assets in the U S only have a $60,000 exemption. Okay. So that requires awareness and planning. You can either make sure not to die while investing. That’s the best thing I can tell you or take out an insurance policy so that, you know, so that you’ll have, when you die, your, you know, your kids will have the cash to be able to pay off that tax or have another plan in place. There are various options. None of them are magic. None of them were perfect and each investor needs to decide which option is best for them.

Charles:
So when you mentioned a double taxation before, what are some of the activities that open the possibility of an investor to facing that double taxation and how do you normally I guess advise people to ways of avoiding it?

Kenneth:
Okay. So by definition, a foreign investor that’s investing in us real estate is subject to tax in both countries. So it’s kind of like a default. So here’s how the taxation and double taxation works. Okay. Let’s take a, an example, an Australian resident, okay. Invest in us real estate and gets rental income in the U S so the U S will tax that rental income because the real estate is in the U S and Australia will also tax it because the owner of the real estate is an Australian resident. Okay. So we have to be aware of how the tax treaties work, who has the first right of taxation and who gets what’s leftover basically to make sure that the investor is able to offset the tax or get credit for the tax paid in the other country.

Charles:
Okay. And that’s done by, I mean, I imagine working, you work a lot, I imagine with the home country or with the your, you know, both countries, is that correct? So you’ll work with representation them for their accounting services and maybe another country that you’re targeting to invest into.

Kenneth:
Yes. Correct. So the, definitely we have to cooperate with all the different tax advisors in any country that’s involved either where the real estate is physically or where the residency of the investor is.

Charles:
Okay. What what’s as you mentioned earlier, FIRPTA can you explain a little bit about this and how clients can go about you know, optimizing their exposure for it and obviously minimizing what they pay?

Kenneth:
Sure. FIRPTA stands for foreign investment in real property tax act. Okay. This is a law from 1980, which was aimed at preventing foreign investors from avoiding us techs, or according to this law, when a foreign investor sells the property, the buyer is obligated to withhold 15% of the sales price, not the profit, not the game sales price. Alright. And send that 15% of the IRS and the investor will usually owe a lot less tax to the IRS for the capital gains on this transaction. So this is, you know, a big cash flow issue because in order to get the money back from the IRS, the investor has to wait until it’s time for his annual us tax return the following year, and then claim the tax credit to receive a refund from the IRS. And depending on when the sale takes place, if it takes place in January, February, as opposed to, you know, December, you know, we can be looking at a year and a half before the investor sees that money back from the IRS. And the way to avoid this long process is to submit a request for a withholding certificate from the IRS before closing the sale. All right. That’s something that the IRS allows it’s on 88 form 88, 22 B. You don’t have to remember the form. The IRS is supposed to respond to that within three months. All right. I don’t know what their reaction time is now with COVID and everything, but that’s, that’s what it’s supposed to be. And during that time, during those three months, the 15% is held in escrow. Okay. It’s not sent to the IRS and you can close the deal in the meantime. And it just sits there until the IRS comes back with the, with their, with their answer. And if, if the investor really doesn’t owe any tax, then the withholding certificate will say, you know, you don’t know any tax, give the whole 15% back. And then he might say, okay, you know, y’all a little tax. So, you know, so there’ll be reduced. And based on that withholding certificate, the buyer or the buyer’s attorney whoever’s dealing with that will allocate the 50% of the funds to the to the foreign seller and the rest goes to the IRS. And obviously if everything goes well, three months is a lot better than a year and a half don’t you think? So that’s, that’s the main way to do it. Obviously, there are ways to avoid FIRPTA in the first place, because FIRPTA is only for a for a foreign, for a foreign seller. So if, you know, if talking about a us partnership or U S corporation then, then there wouldn’t be, there won’t be any firms that there would be different kinds of, of of withholding requirements, but not like that.

Charles:
Yeah, yeah. Not of the whole purchase price or a sale price. It would be obviously of what they expect, I guess, for income or something like that. Yes. Well, that makes a huge difference because obviously if you’re selling something, you didn’t make 15% now, your capital’s tied up your profits tied up everything’s tied up, which the government just wants to make sure that they’re not chasing someone internationally. So interesting. That’s, it’s, it’s interesting about that. I didn’t know about the withholding certificate, so that’s a very interesting, you know, I thought you were kind of stuck in there and you had to wait it out up to over a year.

Kenneth:
Not everybody knows how to do it. Yeah. You gotta, you gotta do it. Right. Because if you don’t do that, you know, if you don’t, if you don’t fill out the forms in the application correctly, the IRS is is gonna reject it.

Charles:
Of course, the four, can you explain a little bit about the ITIN and I kind of want to just, you know, why is it important? Why is it required? And it kind of how someone would go about acquiring, acquiring one.

Kenneth:
Okay. So in general, you know, investor has to be aware of, of the tax filing deadlines, make sure to get their information to the accountant as early as possible. That’s, you know, that’s the first thing before starting with anything. Right. But foreign investors typically don’t have a social security number, right. So they needed an ITN or an individual taxpayer identification number. Okay. In order to have the privilege to file taxes in the U S all right, that’s the number, that’s the, that’s applied to anybody that doesn’t have a social security number. And we generally send the application for this number together with the investors first ever tax return. That’s the process. And it, it is quite a process because if you don’t if you’re not in the U S and you can’t, you know, walk into an IRS office to, you know, identify yourself and get, get an ITA, N the IRS expects you to send your original passport together with the application by mail to the IRS, and, you know, good luck getting it back. So there, there are other options there, there’s, there’s something called a CAA certified acceptance agents that the IRS has all over the world. I happened to be one of them, and those, those agents are able to identify the the, the applicants in order to get an ITA. And they don’t have to part with their original passport for who knows how long. So that’s that that’s the way to get around that requirement, but everybody needs either a social or an ITIN. Okay.

Charles:
Now, once they have that ITIN, obviously they can invest as a foreign investor, but they also can open up an entity in the United States. Is that correct?

Kenneth:
Absolutely. They don’t have to invest directly in a house. They can open up an LLC have that, you know, as a, either as a pass through, and either as a, you know, as a single owner entity, or as a partnership, if they’re two, two or more people that will own the LLC and then the LLC will go and invest in the, in the properties themselves. And then and then that LLC would need something called an EIN, which is literally an employer identification number, but for all intensive purposes, it’s entity identification number for, for an LLC. So in that case, the LLC would need an EIN and the individuals will also need an ITA because an LLC is generally a pass through entity. So the LLC would have to report the partnership tax return, as well as the individuals who will have to also file individual tax returns.

Charles:
Is, are you able to avoid FIRPTA with having a us entity, or do you need to have at least one of the owners of that entity be a USS and to avoid it?

Kenneth:
No. You just have to have, make sure that it’s a partnership, because if it’s only one person only the LLC, then the, the, the LLC is a disregarded for tax purposes. And you just look through to the owner of the LLC, but once the LLC has two people, you’re going to, both of them are foreign people. Okay. Then the LLC is considered a us partnership and there is no FIRPTA on a us partnership.

Charles:
Okay. Awesome. In required in regards to tax returns and filing your firm handles all that with filing us tax returns for your foreign investors. And as well as, I guess, imagine handling it in Israel where you’re located tax returns there, is that correct?

Kenneth:
That’s correct. Personally, I’m a, I’m a CPA in Israel and also an EA and for the IRS. So I could do both. I really focused in the last seven years. I’ve been hyper-focused on, on the U S side. But very soon I’ll be partnering with a within Israeli tax firm. So we can give the the Israeli tax you know, response under one roof for, for people living here in Israel. But like I said, with, you know, people living all over the globe you know, it’s, you, you don’t have to show up in person. Everything can be done virtually. And as long as I’m in touch or the client is in touch also with their local tax advisor you know, we’re good to go.

Charles:
So what tax changes are you expecting and advising your clients on they’ll most likely come in with a new Biden administration? I imagine this is a question that you’re getting quite a lot right now.

Kenneth:
Yeah. I am getting quite a lot. I think everybody is getting it quite a lot and everybody’s up in arms, but the truth is I don’t have a crystal ball and I never did. And I don’t, I’m not sure anybody really has one of those. So I, I know that anything is possible until it actually happens. Right. there’s, there’s a lot of buzz on the 10 31, like kind and that Biden wants to get rid of it. So there’s a lot of talk about that, especially with real estate investors, because that’s something that they take advantage of. But I think that for foreign investors, they have to be careful before agreeing to any 10 31 exchange, even if it does remain an option, because that could actually lead to double taxation also. And I’ll tell you why a 10 31 exchanges, it’s a way to defer capital gains tax to a future year, right? So just because the us allows this tax deferral, it doesn’t mean that the investor’s home country will honor that deferral as well. Right. In fact, I’m not aware of any country at the moment that would honor it. I didn’t look into all the countries, but I haven’t seen anything like that. So instead of offsetting taxes from one country to another, like we said before, according to the treaty, they would end up paying twice without the ability to get a tax credit, since that will be in a, in a future year. Right. That’s another reason why tax awareness and tax planning are so critical. And and, and that’s why, where I think I come in to be able to help foreign investors because people in the U S are not, are not are not thinking in that direction. They’re not aware. They’re not, it’s not on their radar to think about, Hey, you know, maybe a foreign person shouldn’t do the 10 31, right. Who would, who think of that? Right. So, because I have that experience with with so many foreign investors these are the kinds of things that come up and it could save a lot of hassle and a lot of tax for, for the investors. That’s for sure.

Charles:
So are there any typical questions or concerns that your clients have voice that we have not covered yet? That could be beneficial to the listeners?

Kenneth:
Yeah. Many times investors are concerned that they won’t have all the information they need before the tax filing deadline, such as a K one form from a partnership. If they’re a passive investor in a partnership in this case, there’s an option to get an extension for the time to file. It’s usually six months, but I want to make something very clear. The extension that the IRS gives us for extra time to file the tax returns, but there’s no extension for paying the tax returns. You’re paying taxes. I’m sorry. Meaning if the taxpayer expects to owed taxes, you should pay an estimate together with the extension request in order to avoid late payment penalties. That’s something that a lot of people don’t know and they think, okay, I’m getting an extension. You know, I got an extension. Why am I getting this penalty? You know, you have to pay. And if you don’t want to pay then fine, but just, you know, be aware of that, that you can have a late payment penalty. So it’s all about awareness and prevention.

Charles:
I would presume that some of your U S and foreign clients have actually lost money with investing in us real estate, not just paper losses, like depreciation, but in these situations, what mistakes do you commonly see made by them?

Kenneth:
I think unfortunately the most common mistake I encounter is passive investors, not doing proper due diligence before investing money, too many people. I see put blind faith into other people, even friends and family members, and they end up regretting it. It’s, it’s really, it’s really a tough scene to, to see, you know, and, and, and you know, then they come to me as if, as if I did something, you know, I only come in after the fact they did their investment. Now they want me to do their taxes. I’m sorry. Now. but this really could, can be avoided by education. That’s why I think they really need to speak to the tax advisor beforehand, also not just the tax advisors, but also, you know, to do due diligence with the, you know, with the investment itself. I’m not an investment advisor, but I can definitely help educate them on the tax aspects of that. They don’t run into any unpleasant surprises in that, in that situation.

Charles:
Interesting. Where are you seeing for hot places that your, your clients are investing into the U S what States do you see in markets? Do you see or hear that come up a lot?

Kenneth:
Oh, they’re all over, but there’s, it’s very popular to, to hear things in a Texas, Michigan, and Florida, I would say those three are the main ones. I.

Charles:
Interesting, interesting Michigan. I didn’t know that, but Florida, we, we hear all the time about I mean, there’s so many, I have some worked with some brokers in a third of their businesses, foreign investors. So it’s just it’s very interesting. What’s happening a lot of money that’s coming into the United States. So kind of, how can our listeners learn more about you and your firm? Well, the best way is to find me on LinkedIn.

Kenneth:
I’m quite active over there, and I also post tax education nuggets often. And in addition, I have a website. My website is, should I say my website, www.kassnertaxsolutions.com. Casner K a S T N E R T a X S O L U T I O N s.com.

Charles:
Okay, perfect. I’ll put all the links into the show notes and, you know, for YouTube or for the podcast notes, and anybody can reach out to you if they have any questions or want to pick your mind or become a client. So thank you so much, Kenneth for coming on today. And hopefully we can touch base here coming up later in the year.

Kenneth:
All right. Thank you so much.

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:
Thank you for listening to the Global Investors Podcast. If you’d like to show, be sure to subscribe on iTunes or Google play to get new weekly episodes. For more resources and to receive our newsletter, please visit global investor podcast.com and don’t forget to join us next week for another episode.

Speaker 4:
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.

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About Kenneth Kastner

Kenneth Kastner is a US tax advisor specializing in real estate income taxation for foreign investors. Following a decade-long career working at senior positions for accounting firms of all sizes, including the largest one, he established Kastner Tax Solutions. This online firm provides a friendly platform designed specifically for foreign investors, addressing all of their US tax needs.

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