Offshore asset protection structure for investing in real estate

[Outlander]

In the absence of a proper section for discussing real estate and asset protection strategies (hey @Admin...), I'm posting this here.

My partners and I are looking for investing in real estate and at this stage, we're studying how to better structure the operation. In the group there are Americans and non-American citizens, and the property shall not be located in any of the countries where the members live in.

At the very basic level, we're looking to form a multi-member LLC to buy and hold the property - we've been looking at Wyoming and Nevis for such purpose, because both offer a degree of anonymity and charging order protections.

Questions:

• Other than slight differences in asset protection, are there are practical differences for an American citizen (tax and compliance wise) between holding a Wyoming x Nevis LLC?
• Do LLCs offer enough protection or should we also investigate Trust arrangements?

We'd like to hold rental income and eventually buy a second property. The LLCs being a pass-through entity, the profits will be taxed on an individual income level, regardless of any distribution. We'd rather avoid that. So two options come to mind:

1. Set the Wyoming LLC to be taxed as a C-Corp instead (I don't know of an equivalent solution for the Nevis option)
2. Incorporate a second entity which will hold the LLC

The problem with the first option is that federal taxes for the LLC could be higher that some of the member's individual income tax rates, making this option less advantageous for them. Also US taxes tend to be very complex.

The problem with the second solution is the additional cost for incorporating and maintaining the extra entity, but structure wise it makes more sense in case we want to sell the property later on.

Questions:

• Which option would you choose, 1 or 2?
• If option 2:
  • Where would you incorporate the second entity and why?
  • What are the tax implications for the retained profits, for Americans in the group?
  • For the sake of receiving rental payments, do we need to receive them in a bank account in the name of the LLC, or can we receive in the name of the parent company?

Thanks in advance for any contribution

 

[Perry8]

I have normally used Nevis for this type of business.

My general way of thinking when it comes to real estate is that this should nearly always be handled locally. Real estate will normally imply local taxes that cannot be avoided and normally you would also want to rent out the property. This all implies a local company in the same jurisdiction that the real estate is located.

However, from an asset protection point of view you would want to use a jueisdiction with a strong degree of privacy and where filing law suits are expensive and difficult. Nevis is a typical example of this type of jurisdiction, probably the best one as anyone wanting to sue a Nevis company will need to go through a lot of hurdles.

As you can see you have two, at least partially, conflicting views. Typical solutions would be:
1) Owning the real estate in a local company (LLC or LTD), again owned by a company in Nevis.
2) Owning the real estate via a Nevis company. Open a local company (normally a local LTD) that rents the real estate and manage it from there.

As you can see option 2 are way more secure from an asset protection viewpoint but more difficult from an operational viewpoint.

There is no point in creating a realationship with the IRS for those of you that are not US citizens/residents, so I would not use a Wyoming LLC (taxed as a C-corp) or a C-corp. You can use a Wyoming LLC (pass-through entity), but then the members should be one or more entities with limited liability and that is (are) taxed as corporate entities.

 

[Outlander]

@Perry8 thanks for your reply, very informative. So in option 2, the local company doesn't own the property, but has a contract with the Nevis company for managing it, collecting rent and paying local taxes?

Again, since we want to retain profits, wouldn't it make sense to have a company (IBC, corporation, etc) on top of the Nevis LLC?

 

[CaptK]

If this was in the UK, this is how I would approach it.

Local company is the preferred route as it takes away a lot of complications and the initial stamp duty and tax's are lower. A loan comes from the origin of funds with rather high rates and some unfavorable terms Company 1 (C1). This can be done through many different conduits in many different jurisdictions. The loan is charged against the property just like a mortgage and any additional funds invested for development use the same route with admin fees and other expenses on C2.
C3, An offshore company BVI, Nevis, Panama would then handle the collection of rents which barely cover the loan and may even put C2 in default against the loan.

When it comes to the sale of the assets any default interest, fees and charges are tax deductible, this is determined by how well your loan agreement is written. The funds which you have accumulated in C1 are available for future purchases using the same method. C2 Capital gains is mitigated and C3 continues to do whatever it does.

 

[Outlander]

If this was in the UK, this is how I would approach it.

Local company is the preferred route as it takes away a lot of complications and the initial stamp duty and tax's are lower. A loan comes from the origin of funds with rather high rates and some unfavorable terms Company 1 (C1). This can be done through many different conduits in many different jurisdictions. The loan is charged against the property just like a mortgage and any additional funds invested for development use the same route with admin fees and other expenses on C2.
C3, An offshore company BVI, Nevis, Panama would then handle the collection of rents which barely cover the loan and may even put C2 in default against the loan.

When it comes to the sale of the assets any default interest, fees and charges are tax deductible, this is determined by how well your loan agreement is written. The funds which you have accumulated in C1 are available for future purchases using the same method. C2 Capital gains is mitigated and C3 continues to do whatever it does.

Why in your setup do you need an intermediary company C3? Why doesn't C2 pay C1? (I'm understanding from your explanation that C2 collects rent and sends to C1)

What are the odds this arrangement can be classified as fraud by the tax authorities?

 

[CaptK]

C1 is any entity that loans the fund to C2. This can be either of group of people or a company.The jurisdiction of C1 that loans the funds must be in an friendly jurisdiction.

C3 is purely transactional so it only charges an admin fee and a management cost. It pays C2 the balance of rent after costs.
They all have to be seperate entities to take advantage of tax mitigation and can not overlap in any way. If they do so it becomes fraud tax avoidance.