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Finance

What is the Best Structure When Buying a Property in Miami?

Benefit from the best tax optimization, asset protection, privacy, and estate planning. There are numerous fiscal benefits available to foreign investors who buy real estate in Miami. That’s why it is important to choose the legal structure that best suits you.

By Maryline Lacorre 9 Feb 2021

What are the benefits of creating a legal structure for your investment in Miami?

When buying property in Miami, you have the option to set up a legal structure, which may prove highly beneficial. The main goal is to take advantage of the best tax optimization for your project and avoid any additional cost when you resell. You are also able to avoid the estate tax (40%) in case of death. In addition, having such structure offers privacy and asset protection.

What are the different structures?

LLC (Limited Liability Company)

An LLC is an established legal entity that allows investors to purchase and own real estate in such a way that protects them from personal liability. This means that the investor buys and sells real estate—as well as conducts other business—in the name of the LLC rather than as an individual. For long-term investors, an LLC is a great option. It’s perfect for buy-and-hold investments when you’re looking to accrue steady income and long-term capital appreciation. LLCs are simple and cheap to start and require very little paperwork. Another benefit of an LLC is that it’s a pass-through entity. In other words, earnings and losses are passed through to your own personal income tax return, which makes it simple to manage. If you do choose to establish an LLC, however, you must be extremely careful not to mix any personal expenses with business expenses. Doing so will pierce the corporate veil and leave you personally liable.

Corporation

There are two types of corporation: S corporations and C corporations. The S corp is a pass-through entity for tax purposes, similar to the LLC. This means that the income generated by an S corporation will flow through to the personal income tax returns of the shareholders, and the S corp itself generally does not owe any tax liability. By structuring your real estate investment venture as an S corp, you get the flexibility to manage the ownership of the company. The stock of an S corp is transferable (which is not the case in an LLC).

A C corp is most different from both LLCs and S corps. They operate as true corporations that pay their own taxes. The biggest benefit to having a C corp is that there’s no cap on the number of owners. This makes it ideal if you’re pooling investors together for large real estate investments. And because the earnings of the company don’t flow to your personal tax return, you don’t have to worry about income tax liability. However, this means there’s double taxation when you want to pull cash out.

Trust

A trust is traditionally used for minimizing estate taxes and can offer other benefits as part of a well-crafted estate plan. A trust is a fiduciary arrangement that allows a third party, or “trustee,” to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

There are two types of trusts: irrevocable and revocable. As soon as an irrevocable trust is made, the creator ceases to have control of its assets. Only the trust’s beneficiary can make changes or dissolve the trust. With a revocable trust, you still have the power to make changes. Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death. Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Offshore

When properly structured, an offshore fund structure blocks offshore and tax-exempt investors from direct U.S. tax liability. The most common offshore fund structures are the leveraged blocker structure and the side-by-side structure. For most funds, an offshore master-feeder structure set up in a tax neutral jurisdiction (Cayman Islands, British Virgin Islands, etc.) would be sufficient to shield offshore investors. Not so with real estate funds. The principal method used to mitigate tax consequences to offshore investors is a more complex solution: the leveraged domestic blocker.

A leveraged domestic blocker is a U.S. corporation (usually set up in Delaware) that is capitalized with a mix of loans and equity. The aim of the leveraged domestic blocker is to shield offshore Investors from the U.S. tax filing obligations that FIRPTA (as defined under FIRPTA Considerations) imposes, while reducing non-U.S. investors’ effective rate on the real estate fund investment. The mechanics of the leveraged blocker are beyond the scope of this white paper, but the primary benefit is the interest deduction available with a leveraged investment that is used by the leveraged blocker to reduce the leveraged blocker’s income subject to U.S. tax. The protection afforded by the blocker will vary depending on the particular investor and investment. With the proper structuring, there is a potential to eliminate offshore investors from being subject to FIRPTA consequences.

How to choose the right legal structure

Each legal structure has its advantages. Which one is right for you depends on your situation and the long-term purpose of your project. We work with excellent lawyers worldwide who will be able to advise you. Don’t hesitate to contact us and we will put you in touch with them.


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