fbpx
Global Investors Podcast
GI113: Tax Planning When Foreign Investing in US Real Estate with Olga Vodolazschi
August 19, 2021
0
GI113: Tax Planning When Foreign Investing in US Real Estate with Olga Vodolazschi

Olga Vodolazschi was on episode GI31 and she is an attorney based in Miami Florida and focuses on International Taxation, Estate Planning and Foreign Tax Compliance. Olga speaks; English, Spanish, Russian, French and Romanian.

Watch The Episode Here:

Listen To The Podcast Here:

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 Olga Vodolazschi. Olga was on episode GI31 and she is an attorney based in Miami Florida and focuses on International Taxation, Estate Planning and Foreign Tax Compliance. Olga speaks; English, Spanish, Russian, French and Romanian. So thank you so much for being on the show. Olga,

Olga:
Thanks so much for having me and I hope this episode is going to be useful to to your listeners.

Charles:
Yeah, I bet it will be. So give us a little about your background prior to starting your current law firm.

Olga:
Sure. so I started my career in it actually in the accounting world and one of the big four accounting firms in the mergers and acquisitions department, and they moved through several mid size accounting firms where I would handle all of the consulting projects and the international clients whether those were international families or international businesses, they were trying to set up their presence here in the U S or those would be families or again, businesses trying to invest in real estate, right? Whether it’s for personal use for investment or whatever, whatever development, whatever the end goal was. And I think the big advantage that, you know, my current practice can offer to the clients. And it’s a big advantage to the clients as well, is that having this accounting background you know, I kind of see the interplay right of the legal world where the accounting, because I so often see how clients have a legal structure, they come from an attorney, but then there’s the discrepancy as to how do I have to report it?

Olga:
What do I have to do with it? And as your listeners might know you know, IRS and the reporting system in the U S is quite complicated and intricate and sometimes even informational forms, if those are not done properly the taxpayers can carry heavy penalties and consequences. So you know, having this you know, having my foot in both worlds which I do in my current practice we give the advice, the sort of the legal side, but we also do all of the compliance in-house as well. So that’s a big advantage to the clients.

Charles:
So what are the main concentration areas that your firms focusing on? I mentioned a few and obviously international taxation is one of them, but what is, what is what you’re working on day to day with your clients that they come to consult you with?

Olga:
Sure. So, you know, by virtue of our location here in south Florida and specifically I’m, I am located in Miami. The, the main concern always is we’re moving to the U S and we would like to maybe invest in real estate, what is the best structure? So I advise clients on that. And you know, maybe they’re moving here on an investor visa. So again, there are obviously all the implications, the U S is a worldwide taxation system. So it’s always good to understand how that will affect the client prior to you know, the individual, the family moving to the us. Maybe they want to structure her business. So they want to open a subsidiary, a branch you know, have some kind of presence here. Then again, there are questions as to what is the best structure, what is the best entity?

Olga:
How will that affect my taxes in my local jurisdiction? How can they minimize the taxes here? So all those questions, maybe they’re coming from a tax treaty country. So that could be advantages there for them. You know, then obviously they state tax questions also come up. If they plan to stay here for longer, or they’re still non-residents, or they are us. So kind of all of those you know, main questions from international taxation world always, you know, part of my day-to-day activity. And as I mentioned before, I also handle all the compliance aspects. So if we already set up a structure, let’s say we advise the client on on the real estate structure, then we can handle that. Day-To-Day would you, they counting, would you, the tax returns and whatever other reporting requirements that unnecessary, depending on the structure that is being implemented.

Charles:
Okay. So we’ll have investors sometimes they’ll reach out to us and kind of ask us where do we start? So I kind of want to give like a little bit of a brief overview if we can. So a foreign investor consults with you about purchasing a piece of us real estate, and they’ve never invested in the U S before. How does the legal and tax planning process unfold? What are, what are the main questions you’re asking and how does that impact the overall plan when let’s say a year initial consultation with them figuring out what, what do you want to know and how, when, why is that so important?

Olga:
Right. So you know, the first question I always ask if they are foreigners or they are us tax residents, because oftentimes, you know what we call here in the U S the incidental us person especially in the Latin world that is very common that, you know, maybe they were born here but the, the specific client lives all his or her life abroad. So they might not even think that they’re actually a us tax resident, right. So that would obviously impact the type of structure will suggest when they would be buying real estate in the U S so that is always the first question. Are you a forerunner for the, you know, in the, in, in the form that we think of from tax point of view, or you have a green card, or you are in the process of applying for a green card, or you are just spending a certain amount of days in the U S here by virtue of which you would become a us tax resident.

Olga:
Then always the question is, of course, what type of investment are you considering? Is it just the property for your personal use? Is it for rental used? Maybe you’re investing in a real estate fund and you will just be a passive investor sort of understanding what is the you know, the business model, so to speak. Then of course is what is the value of the property, because, you know, we don’t want to come up with some ultra sophisticated structure if the value is not that high. Right. So usually I say, if it’s around a $500,000, let’s say I would not recommend anything sophisticated than maybe, you know, a life insurance would be fine in order to protect from estate tax purposes. And, you know, I’ll get into state tax purposes, which is a very big concern for, for foreigners right before discussing foreigners.

Olga:
And then, and then again, to understand who would be the other investors, if it is you know, if we’re talking about a fund because by attribution from other investors, this foreigner could also have additional implications right. For reporting purposes. So I always need to kind of know the big picture, you know, who are the investors? What is the property, what is the purpose of the property? Is it for short term, are you just flipping properties? And, you know, in two or three years, you’re going to get rid of it, or is this a long-term investment, you know, for their kids and grandkids and so on and so forth. And then of course we can think of estate planning concerns, right. Maybe there is need for a trust or, you know, for something more to cover the future generations. Right. so I think those would be, you know, the, the main, obviously there are additional questions, but these would be the, the main the main concerns that I would have before suggesting anything interesting.

Charles:
Okay. So we, we put together a book a few months ago, and it was a guide. We called foreign investing in us real estate. And if anybody wants to get it, they can go to us investing guide.com and get it there. But you discussed a few different points that seem to be very important with foreign investors. The first being a double taxation, which is something that interests me as well when investing outside of the U S as well as investing in the U S obviously I don’t have that issue, but how does this work with income in the U S and are you consulting with clients and their accountants back home, which is something too, like you said, if there’s a tax treaty, so what, how does that work? Are you when you’re doing, is it I imagine if they have this type of money they’re coming here to invest, they might have an accountant back home. And are you kind of passing stuff through them as you’re making up their plan here?

Olga:
Yeah, sure, sure. And, you know, again, as I mentioned, if it’s a, if, if they’re investors coming from a tax treaty country, that is always a big advantage because, you know, a simple example if we are doing some estate tax protection putting a foreign blocker in the structure any distribution of dividends to that foreign entity for instance would be taxed at a much lower rate than the general rate of 30%, because that is the tax rate upon withholding of dividends that are being sent to a foreign entity. So if we have a tax treaty, you know, in Latin America, again, I focused on that American by virtue of our location here, but in Latin America, they only only two tax treaters. We only have Mexico and have Venezuela, right? So, I mean, Venezuela is not that big of a player right now, but we have Mexico, which you know, the the withholding rate can come much lower from the 30% and can go down to five or to 10%, which is a very considerable difference.

Olga:
So, you know, again, the tech street has always played a role in Europe. We have much wider variety of treaties if you have an investor from Europe so yes, there’s always an interplay of, of, you know, where they’re coming from, who is, you know, if they, what what is the tax rate that they pay in their local jurisdiction? And that’s where the local accountant would come in. Because when we talk about double taxation, it doesn’t literally mean that they have to pay, you know, X amount of taxes in their local jurisdiction. And then X amount of tax is here on the us. There’s the concept of what it called a federal tax credit, meaning that whatever tax is already paid and the local jurisdiction, we can take some percentage here in the U S and, you know, that’s where intricate math calculations and, you know, their ratios and so on and so forth that come into play. But, you know, that’s what double taxation is. We’re trying to avoid that the taxpayer is double tax, right. And the local jurisdiction, and here in the U S

Charles:
Right. So you’re you, if you pay something here, you might pay the rest to a different country. So you might split it up between countries. I want to talk about something, you just brought up the the 30% withholding, cause this is so safe. There’s a passive investor here in the United States. They make $10,000 throughout the year and say, they’re like, I believe like Hong Kong doesn’t have a doesn’t have a tax treaty with the United States. Is that correct? So like, if there that now the sponsor on the group is syndicator on that investment has to withhold 30% and of that, and they’re going to get that $7,000, is that correct? And then they have to file a tax return for the following year to get that, is that correct?

Olga:
Right. So usually that would in a corporate structure, you know, if they are an investor in a pass through entity, when I say pass through, it would be, you know, your typical partnership from a us point of view. So there wouldn’t be withholding for them there, but the foreigner would just have to pay you’re right about paying taxes in the U S on whatever the share that corresponds to their percentage of investment. Right. So they, if they’re, I don’t know, 10% investor whatever whatever the net income is at the level of the partnership fund. Usually the funds are structured as partnerships in the U S then that would flow up to the foreigner. And then yes, he, or she would have to apply for tax ID in the U S and, and pay their share in the us. We do have progressive rates. So it kind of depends what, you know, what bracket they fall into and then the tax would apply. But, you know, again with real estate funds, they’re always you know, a lot of expenses deductions that the fund can take. So, you know, depending again, on the investment the numbers will end up whatever they are and then the investor, the investor would be subject to tax in the U S correct. Right.

Charles:
Yeah. Every, every phone would be a little different, but just giving you a broad overview of kind of how it would work. So I have a, like our, our firm here, we have several, ex-pat like passive investors in our deals and they live abroad. I have one that lived abroad for over a decade and are there deductions from us taxes that ex-pats can make? So I know, I, I think I it’s on earned income, but is that also available? And how does that work if it’s available also on passive income?

Olga:
Right. So what you’re mentioning is the foreign earned income exclusion you know, before anything, I just wanted to mention that there’s the misconception that just because, you know, I live abroad and I’m an X bed, right. I’m a us, but I live abroad. And you know, I heard about this, this exclusion which every year is adjusted for inflation. So I believe it’s around 108 or around a hundred thousand for this year. So just because I have it, I don’t have to do anything. And that is a big misconception. They expect, still have to file a tax return and they actually, there’s a, there’s a specific form that applies in order to claim this exclusion. But yes, it, you know, there’s certain requirements that you have to comply in order to qualify for this exclusion. You know, you have to be a bonafide resident, what is called in the local jurisdiction. There are certain amount of time that you have to live abroad. There’s also an exclusion for your home that you have abroad. So it, you know, it kind of depends on case from case to case, but yes, the foreign earned income exclusion is, is, is a big advantage because you are literally excluding that income, your tax return from the U S and you wouldn’t be subject to tax on that. Okay.

Charles:
Interesting. Yeah. I was reading something was 330 days. They had a little broad, so I think that’s like 11 months. So it’s quite a time. It’s not something that you’re gonna do avoid with just being out of there for a few months,

Olga:
Right? Yes, exactly. It’s, it’s, it’s quite stringent. Yes. There are several requirements. What you are mentioning. Yes. There is the three 30 days then there’s just the, for the whole year, then if you’re from a treaty country, then there’s also a different requirements. So there are certain certain things they have to comply with in order to qualify.

Charles:
So if an investor, a foreign investor wants to invest in the U S but does not want to become a resident, do they need to disclose their foreign assets when you are developing this plan?

Olga:
No. I mean, if they are, if they are purely a foreign and they, you know, I always ask question, I always ask the client if they are considering applying for for a green card, or if they’re planning to come here, because if that is true, then of course, we’ll have to look at the whole picture of their, you know, kind of get a snapshot of the worldwide assets, but if they’re pure foreign investor and they’re just coming to the us for you know, for, for real estate investment, then what we are concerned with is their us source income, right? Because the difference between foreigners and us tax resident is that foreigners are subject to tax on us source income, and us tax residents are subject to tax on worldwide income. So those were the differences.

Charles:
Okay. All right. The one thing that when I speak to people that are coming to invest it’s also, it’s always a state taxes because it’s something that differs dramatically from a U S citizen to a foreign investor. Is that something that can you give us a little explain, like how the effects of this for how it works for state taxes for a foreign investor?

Olga:
Sure. So you know, we can take an example. I think example was always always at the best to understand Jenisha and co concepts. So, you know, if we have, if we have an investor who has million the fair market value of the property is $1 million. At the time of death of the foreigner, assuming that he or she owns it in personal name, right. We’ll take the easiest scenario, which is not the best. But assuming that he or she has this property in their personal name at the time of death, there’s an estate tax that would apply, which would be 40 and 40% on the fair market value. Right. Which is crazy consequence to foreigners. Once you mentioned it to them. And they only have an exemption of 60,000, right? So you would take the million minus the 60,000, whatever is left 940,000, and you would apply 40% on that.

Olga:
Which is the dramatic difference between the foreign and the us, because while foreigners have only 60%, 60,000 exemption us individuals like myself, you Charles, we have currently over 11 million exemption, right. For estate tax purposes and forgive tax purposes. So that’s why it is so important. As I mentioned at the beginning of our conversation, the question is always, are you keeping it full long-term? What is the value of the property? Are you actually a foreigner? You, are you, are you S are you planning to come to the, to eventually to the us because then the planning comes into place? The easiest planning is of course, to put a foreign blocker that I, I mentioned prior what would that do that at the time of that the foreigner would not have any single view a source, what he was, she would have would be shares of a foreign entity, for example, right. So that would not be your source and therefore estate tax would not apply. So that is usually the easiest planning and the easiest recommendation upon purchasing purchasing real estate. But again, it depends what is the value of the property, because, you know, the maintenance of an offshore company also has costs and, you know yearly tax returns and so on and so forth. So again, it kind of depends on the specific numbers and goals of the investor. Yeah,

Charles:
For sure. And that includes for if they’re invested obviously in real estate, which is what we’re talking about here, but also just so people can keep into us stocks and us bonds. Correct. That’s part of it too. So if they have that

Olga:
Correct. So if they would have, you know, a personal account and yeah. In their name, and they would be investing in, you know, apple stock or Google stock, whatever it might be because those are us sores. Those would also be subject to estate tax you know, certain us bonds government bonds, those exempt you know, if you just have a simple checking account that would also be exam. So with the state tax there you kind of, you know, w what we do, for example, if we have an unfortunate case of a, of a client passing away we actually have to request the portfolio breakdown from the financial institution and go line by line and seeing what exactly they have, because certain things from that portfolio could be exempted. Okay.

Charles:
Very interesting. Yeah. So it’s, there’s some nuances between us investors and foreign investors here in the U S but it all just comes down to two, you’re having a plan and a plan for someone that has a million dollars versus someone that has a hundred thousand dollars or less, it’s going to be completely different. So it really just reach out to Olga and she can kind of go over everything with you with your specific situation. I want to kind of open it up to you a little bit in kind of see, are there any other typical questions or issues that foreign investors might have that we have not addressed? So what are you typically answering to people if we haven’t covered it here, or concerns that you think are very important that people should be aware of, that they usually don’t ask about? So,

Olga:
Sure. There’s one thing that I think is important, and I would like to mention it the concept of exit tax. So, you know, foreigners, if assuming that they already enter the U S you know, their investors and, and eventually, you know, they invested in the real estate fund, but then they decided to move to the us. They need to be aware that there is a concept of exit tax. And I mentioning this because I actually have two clients currently who I’m dealing with this issue, and they were complete down the where that this is applicable to them. So as the tax applies in certain circumstances there are various requirements, but one of them, which is the most common is if the individual has over 2 million in net worth upon exiting the us. And there are also time requirements in order to be subject to this exit tax.

Olga:
In, in the case of a green card is if the individual is maintaining a green card for eight years over the last 15 years. Right. So if that is true, then the next step would be to see what is the net worth of this taxpayer. So if the next war, if the net worth is over 2 million, then the exit tax would apply. What does that mean? That the day prior to expatriation the, we basically look at all the assets and we assume that everything was sold, right? So you technically not selling it, but you will be subject to capital gains tax. So if we’re talking about a considerable net-worth the could be considerable consequences, right. And that includes everything again, worldwide assets, right? Real estate here, real estate abroad bank accounts, investment you know, just think of a simple investment account, right.

Olga:
That they might be holding in their home jurisdiction. So that would be subject to exit tax as well. It’s as if they would be selling their stocks and their bonds and so on and so forth. So you know, it’s good to advise the client before, because there, they’re obviously a lot of strategies that we can come up with and advise the client how to mitigate this ad exit tax prior to actually go into the consulate in their jurisdiction and relinquishing the green card. So it’s a concept that is often overlooked, and I do like to mention it to clients you know, even if they just consider coming to the U S it is something to think about and kind of keep it in the back of the mind, because it’s something with complain for.

Charles:
Interesting. just on that too, cause you brought it up. What is it when they’re when they’re leaving is a, it takes, cause I had a I had a business person that was looking at doing that and they’re talking to me about it and it was like, it’s like, it takes so many months for them to at least just get the appointment right. To do it, especially with COVID to, if they want to leave the U S is that correct?

Olga:
Yeah. I mean, currently, you know, because of COVID all the all the government bodies are a little bit delayed but basically how it works with exit tax is there’s a form that you fill out. Then I believe it’s called, you know, relinquishing, lawful permanent resident. There’s an actual form that you fill out. Then once you give that form and you sign it, you date it. Once you give that form to the consulate, that would be the date effective your you know, departure from us. And from that moment on the taxpayer is treated as an non-resident. So he, or she would be subject to tax on the, on us source income. And often when that happens is, you know, it sort of splits the year. Let’s say if the taxpayer leaves in the middle of the year and doesn’t wait until December 31st, then from a compliance point of view, you have to make sure that you do a tax return for half a year as a us resident and then for half a year as a non-resident. But yes, I mean, there are more intricacies you know, maybe we can do it on the podcast just on this topic, not just scare your clients, but the important you know, the, the take away is that it’s just important to discuss all this various concepts and they’re planning strategists that can be implemented as long as we know in advance, what the plans of the client are. Interesting.

Charles:
Okay. Well, I appreciate that kind of going on a little tangent there, but as we’re fi finalizing everything now can, is there any other common mistakes that you see foreign investors make when investing in the U S

Olga:
Sure. Just, you know, the most common one. And when I gave the example about the state tax purchasing real estate and personal name, and it’s almost never a good strategy because later let’s assume that this was already done and the client comes to me with the structure. It is doable. You can change it, but there are additional costs and implication for the client that can obviously be avoided from the beginning. You know, then we’ll have the concept of FIRPTA which is another mechanism would apply what that applies to specifically to real estate upon a foreigner disposing of property in the U S so we could pass this property to a foreign blocker for example, but there will be for the, so that is the most common mistake. And usually, you know, when, when they’re closing the real estate agent or the real estate attorney, they don’t involve, or maybe, you know, the tax attorney was not there from the beginning. So it’s just important to kind of implicate all the parties from the beginning, right? From a real estate point of view from tax point of view, from accounting point of view to, to present beneficial structure from the beginning. And I always like to avoid this additional costs to the client that can be prevented from the beginning.

Charles:
Yeah. Okay, perfect. It’s very informative. Thank you. And so where can our listeners learn more about you and your firm Olga?

Olga:
Sure. So my, my law firm name is Ovie law group. There’s the website, I think it’s at the bottom of our follow podcast. And there’s my number, my email. And I’m more than happy to, to answer any questions that your listeners might have.

Charles:
Okay. Well, thank you so much for coming on. I will put that link into the show notes, and hopefully we can connect here in the near future as Florida is reopening and the U S is reopening.

Olga:
Yes, that would be great. Thank you so much, Charles. And hope we can meet in person eventually. I already forgot what it is to hang out in person. Thank you very much. Thanks Charles. Thank you. Bye bye.

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 LLC exclusively.

Links and Contact Information Mentioned In The Episode:

About Olga Vodolazschi

Ms. Vodolazschi focuses her practice in areas of international tax and compliance, immigration planning, real estate structuring, estate planning and FATCA & CRS compliance. Ms. Vodolazschi holds 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. Ms. Vodolazschi spent her professional formative years at one of the Big Four accounting firms in the Mergers & Acquisitions department, after which she moved to a mid-size advisory and accounting firm to focus on the private client side, where she guided high net-worth individuals, entities and families of diverse backgrounds from all over the world. Ms. Vodolazschi is fluent in five foreign languages and can easily bridge the cultural gap with any client.

0

About author

Admin

Related items

GI117: Utilizing Cell Towers to Maximize NOI with Hugh Odom

GI117: Utilizing Cell Towers to Maximize NOI with Hugh Odom

Read more
SS39: How Do You Raise Rents?

SS39: How Do You Raise Rents?

Read more
GI116: Multifamily Investing and Property Management with Matt Brawner

GI116: Multifamily Investing and Property Management with Matt Brawner

Read more

There are 0 comments

%d bloggers like this: