Investing in Syndications as a non-Citizen
Below, I have outlined a general guide for participating in US-based real estate private equity investing for international investors.
Incorporate US-based LLC / Corporation
Apply for EIN (Employer Identification Number) and Register the LLC with Various Required Agencies
Execute an Operating Agreement Among Partners
Apply for ITIN (Individual Taxpayer Identification Number) or Social Security Number
Open US-based Bank Accounts
Filing the LLC US Tax Returns (Federal, State and City) and Personal Tax Returns for all Partners
Tax Treaty Benefits Are Available
#1 – Incorporate US-based LLC / Corporation
To get started, foreign investors need to create an entity to invest with. For foreign investors, two structures are available: LLC or corporation. The former – LLC – is preferred as it avoids double taxation and offers the most tax efficiency.
A single owner LLC is considered a disregarded entity and treated as a personal business for tax purposes. Hence, it loses most of the LLC benefits, and therefore it is best to have a minimum of 2 partners. With a minimum of 2 partners, all the tax benefits can now come into play.
The equity split does not matter. For instance, an LLC could have 50/50, 1/99, 40/60 or any other split. In our experience, most foreign investors tend to open these LLCs with their spouses or partners.
#2 – Apply for EIN (Employer Identification Number) and Register the LLC with Various Required Agencies
Once the LLC is incorporated, the investor must apply for an EIN (Employer Identification Number) and register the LLC with various agencies. A lawyer is useful here
#3 – Execute an Operating Agreement Amongst Partners
Next, you must draft and execute an operating agreement amongst all partners of the LLC.
#4 – Apply for ITIN (Individual Taxpayer Identification Number) or Social Security Number
It is not uncommon to find overseas investors who already have a social security number, if they have lived in the US for work. However, if you don’t have one, you will need to apply for an individual taxpayer identification number (ITIN).
Each individual partner in an LLC needs to apply for an ITIN. This can take up to 60 days. Our experience indicates that most clients are able to get their ITIN within 4-6 weeks.
#5 – Open US-based Bank Accounts
Once the EIN, operating agreement and ITIN are available, a foreign investor can open a US-based bank account. With our extensive banking relationships, we can help you in opening the right bank accounts with global banks that have exceptional customer service and online access.
#6 – Filing the LLC US Tax Returns (Federal, State and City) and Personal Tax Returns for all Partners
The LLC needs to file returns as well as partners have to file personal tax returns. The K-1 (tax return for syndicate partner) often has significant deductions that results in paper losses each year, while you keep making cash flow, before a sale occurs, say in 5 years.
Hence, those losses can be offset against future gains to reduce the tax bill.
Investors need to consult with their local professionals to determine tax and related disclosure requirements. For US legal structures – asset protection strategies – US-based legal professionals can provide the best advice.
#7 – Tax Treaty Benefits Are Available
These vary country by country and can dramatically alter the net returns that investors get from their investments. It is advisable to consult with your CPA.
Cross-posted from Boardwalk Wealth
