Relevant Facts
Armando Perez a citizen of Colombia who has owned three Real Estate Properties in the US titled to his name. Colombia does not have a tax treaty with the US. Properties A, B, and C were purchased on January 1, 2014 and their adjusted bases and fair market value are $97,800/150,000, $86,223/135,000 and $52,077/155,000 respectively. There is no depreciation recapture on any of the properties and they are currently rented and no significant improvements have been made to the properties since they were purchased. Mr. Perez made the election to treat his real property income as effectively connected with a US trade or business under I.R.C. § 1.871-10, in order to avoid a 30% withholding on the rental income received from the properties. …show more content…
Perez wants to make sure there will not be tax consequences on the transfer of the properties to the US corporation. If the transfer has no tax consequences, Mr. Perez wants to know the basis and holding period his stock will have once the properties are transferred to the corporation.
Conclusion
Since Mr. Perez is a nonresident alien and as long as the requirements of I.RC. § 1.897 -6T(a) are met, he will not incur taxes on the transfer of the properties to the US domestic corporation. The transfer of the properties will be done under I.RC. § 351 (a). Mr. Perez basis on the stock will be $236,100 and his stock and properties will have a long term holding period.
Support
In order to determine the possible tax consequences for Mr. Perez, we need to first determine if he may be considered a resident alien for tax purposes. I.R.C. § 7701 (b) (1) (A) defines a resident alien as an individual who either in a calendar year is: (i) Lawfully admitted for permanent resident or; (ii) Meets the substantial presence test or; (iii) Makes an election to be considered one under certain …show more content…
The date an entity already considered a USRPHC acquires any USRPI or disposes any foreign real estate used for business that does not qualify as USRPI.
Mr. Perez domestic corporation will be a new entity duly registered in the state of Florida; and, will not hold any investment in foreign real estate investments. Furthermore, 100% of its assets (properties A, B, C) will be USRPIs used in a trade or business in the US. Upon the transfer of these assets, the corporation will be considered a USRPHC; thus, making its stock taxable under FIRPTA.
Third, we need to determine the requirements of paragraph (d) (1) (iii) of § 1.897-5T. Since the transfer will take place after December 31, 1987, Mr. Perez needs to file, “an income tax return for the taxable year of the distribution or transfer.” The paragraph further states that the return should be accompanied by a statement with the following information: that the transfer applies to section 897, a description of the USRPI transferred and received, the amount of any gain recognized and any tax withheld on the transfer, and a signed declaration indicating the subsequent sale of the USRPI transferred is subject to US taxation disregarding any tax treaty provisions or change in circumstances. Mr. Perez already files a form 1040NR where he has reported his rental activity since January 1,
Armando Perez a citizen of Colombia who has owned three Real Estate Properties in the US titled to his name. Colombia does not have a tax treaty with the US. Properties A, B, and C were purchased on January 1, 2014 and their adjusted bases and fair market value are $97,800/150,000, $86,223/135,000 and $52,077/155,000 respectively. There is no depreciation recapture on any of the properties and they are currently rented and no significant improvements have been made to the properties since they were purchased. Mr. Perez made the election to treat his real property income as effectively connected with a US trade or business under I.R.C. § 1.871-10, in order to avoid a 30% withholding on the rental income received from the properties. …show more content…
Perez wants to make sure there will not be tax consequences on the transfer of the properties to the US corporation. If the transfer has no tax consequences, Mr. Perez wants to know the basis and holding period his stock will have once the properties are transferred to the corporation.
Conclusion
Since Mr. Perez is a nonresident alien and as long as the requirements of I.RC. § 1.897 -6T(a) are met, he will not incur taxes on the transfer of the properties to the US domestic corporation. The transfer of the properties will be done under I.RC. § 351 (a). Mr. Perez basis on the stock will be $236,100 and his stock and properties will have a long term holding period.
Support
In order to determine the possible tax consequences for Mr. Perez, we need to first determine if he may be considered a resident alien for tax purposes. I.R.C. § 7701 (b) (1) (A) defines a resident alien as an individual who either in a calendar year is: (i) Lawfully admitted for permanent resident or; (ii) Meets the substantial presence test or; (iii) Makes an election to be considered one under certain …show more content…
The date an entity already considered a USRPHC acquires any USRPI or disposes any foreign real estate used for business that does not qualify as USRPI.
Mr. Perez domestic corporation will be a new entity duly registered in the state of Florida; and, will not hold any investment in foreign real estate investments. Furthermore, 100% of its assets (properties A, B, C) will be USRPIs used in a trade or business in the US. Upon the transfer of these assets, the corporation will be considered a USRPHC; thus, making its stock taxable under FIRPTA.
Third, we need to determine the requirements of paragraph (d) (1) (iii) of § 1.897-5T. Since the transfer will take place after December 31, 1987, Mr. Perez needs to file, “an income tax return for the taxable year of the distribution or transfer.” The paragraph further states that the return should be accompanied by a statement with the following information: that the transfer applies to section 897, a description of the USRPI transferred and received, the amount of any gain recognized and any tax withheld on the transfer, and a signed declaration indicating the subsequent sale of the USRPI transferred is subject to US taxation disregarding any tax treaty provisions or change in circumstances. Mr. Perez already files a form 1040NR where he has reported his rental activity since January 1,