A Step-by-Step Guide to Owning Property Abroad

The Global Citizen

One of my clients, Caroline, owns 15 residential properties in four different countries.

But last month, when I spoke at the Real Estate Trend Alert annual Gathering event in Playa del Carmen—I learned Caroline isn’t alone.

Thanks to our friends at RETA, IL subscribers are accumulating investment properties around the world. I met people who owned half a dozen, a dozen, even two dozen foreign properties!

Few investors understand the need for an integrated structure to manage these global assets. US-based attorneys and accountants typically don’t understand these issues either. That means many of us are embarking on our global diversification journey without being properly prepared.

I’m going to show you how a global asset management structure can achieve four goals:

Avoid the pitfalls of investing in countries whose inheritance laws differ from those at home—and thus you can pass your property on to your chosen heirs.
Avoid having to classify income from foreign rental properties as personal income, with all the hassles that go with accounting it.
Avoid personal liability for anything that happens at these properties. In other words, protect yourself in the event of a lawsuit.
Simplify the property management process… and pay yourself a potentially tax-free salary for doing it.

3 Challenges with International Real Estate

When you buy foreign real estate, you’ll face three potential issues…

Passing on Your Property to Your Heirs

Only the US, Canada, the United Kingdom, and other ex-British territories follow the inheritance, estate, and probate rules we’re used to. These countries follow common law, which allows individuals to create wills and trusts.

But most other countries practice civil law. That includes the most popular markets for real estate investors, Europe and Latin America. In such countries, estate planning is quite different:

Your personal will doesn’t apply. Although a few civil law countries recognize international wills, most require that you follow their estate laws.
Property must be divided among surviving relatives according to a fixed formula. Let’s say you don’t have any children. When you pass on, your property must be liquidated and distributed to your siblings, nieces and nephews, or even cousins.
Trusts aren’t recognized. Your US grantor trust has no legal standing under civil law. Putting foreign property in it will address US estate issues, but overseas, it’ll be treated as if you owned it directly.

Owing Tax in the US

Taxpayers in the US and Canada owe income tax on their global income, including rental from foreign properties. It’s treated as personal income and taxed accordingly. All that foreign-source income can easily push you into a higher tax bracket.

Of course, to ensure you’re taxed only on your profits, you must account for all expenses on your foreign rental properties, a time-consuming process. So your foreign property investments don’t just involve capital; they also require significant personal labor every year.

Thirdly, if you think about it, paying income tax on your rental income every year means you have less to reinvest in other properties. Companies, on the other hand, can retain income and reinvest it, accumulating wealth more rapidly.

Personal Liability if You’re Sued

You’re personally liable for property owned in your name. If a tenant has an accident or suffers damage, you can be sued, not just against the property in question, but against all your global assets.

A 3-in-1 Solution

Fortunately, there’s a solution that fixes all these problems. It applies three principles:

Legally separate ownership of your foreign rental properties from yourself by creating a legal structure to hold them.
Let rental income accumulate in that separate structure until you’re ready to use it.
Have that structure pay you a salary for managing those assets.

The details of applying these principles can be complicated. But the general steps are straightforward:

Vest the title of your foreign real estate in limited liability companies (LLCs) or their local equivalent in each country, not in your own name. This is the crucial step, because even without the rest, it allows you to avoid local estate laws by making your heirs members of the company. When you pass on, they simply assume ownership of it with no probate.
Create an irrevocable asset protection trust (APT) in a country that doesn’t tax trust income and/or doesn’t tax income earned outside its borders. It’s important that this trust is what’s known as an irrevocable trust, otherwise it will be regarded as a pass-through entity for tax and liability purposes, negating the exercise.
Have the APT create a limited liability company (LLC) in the same jurisdiction or another one that doesn’t tax foreign income. That “umbrella” LLC is APT’s main asset. Remember, in civil law countries’ trusts can’t own property. But a foreign LLC can.
Transfer ownership of the LLCs in each country where you own property into that umbrella LLC. Rental income from your properties rolls up into the umbrella LLC, where it’s sheltered from income tax because a) the LLC is registered in a no-tax jurisdiction, and b) you don’t own it directly. In this way the income from your global rental properties bypasses the tax system of your home country altogether.
Rental income can be reinvested in other properties or other income-generating assets. Because the APT isn’t paying income tax, there’s more available for that reinvestment, generating wealth faster.
Have the APT hire yourself to manage the umbrella LLC and pay you a salary. This allows you to manage properties… choose new investments… practically everything that you would do anyway but get paid for it. The cherry on top is that the umbrella LLC can pay for your flights, car hire, accommodation, and any other legitimate expenses involved in managing your global properties.

What You’ve Just Achieved

With the strategy I’m recommending, you’ll get these benefits:

You aren’t paying personal income tax on the rental income or capital gains from your global properties. The countries where your properties are located may tax the local LLC you’ve set up to hold it, but you won’t be liable for personal income tax. And if your APT is located in a no-tax jurisdiction outside the US, the IRS won’t tax that income either.

The income flowing into the APT isn’t subject to upfront tax, so it can compound faster. The umbrella LLC can reinvest this income in other properties, or in other assets. Instead of investing 50% or 60% of the income after tax, you can invest 85% or 95% of it.

You can receive regular payments from the APT according to your financial needs. Naturally, when you set up your APT, you’ll make yourself and anyone else you choose the main beneficiaries. Like any trust, you can specify how and when payments are made, who your heirs are, and so on. When you do take distributions from the trust, you’ll pay tax on that, as well as on your salary from the umbrella LLC to manage all the properties around the world.

All these global properties are owned by companies that are in turn owned by a foreign legal structure, so they don’t have to go through probate. When you pass away, the properties are simply transferred to whatever beneficiaries you specified when you set up the APT.

Properties owned in a structure like this won’t be subject to inheritance tax in most cases. That’s because technically there is no inheritance. Instead, ownership of properties will simply remain with the local LLC, which will in turn remain with the umbrella LLC, which in turn will still be owned by the APT.

Each property is now segregated from all the others, reducing the potential impact of any lawsuits. Although the LLCs that own properties in individual countries are subject to liability for what happens in them, a litigant won’t be able to go after other properties.

What Else Do You Need to Know?

There are a few other things to be aware of… The first is that the IRS doesn’t like this sort of structure, but that’s their problem. Most US accountants and lawyers will also tell you it’s a bad idea, because they don’t understand how the system takes perfectly legal advantage of foreign laws.

The second thing is that transferring personal assets into a foreign trust may trigger gift taxes if you exceed a certain threshold. Currently, as long as the transfer is $14 million or less, it won’t attract such tax. But if you vest ownership in foreign LLCs up front, you can avoid this problem.

The IRS uses a formula that increases the tax rate on income from a trust based on how long ago it was earned. To maximize the tax benefits, it’s important to have a good trustee and accountant to manage income flows so that you’re paid from the most recent income rather than the oldest.

If you want to use this strategy I’ve outlined for yourself, you’ll need to work through accredited experts.

I’m not an accredited accountant or attorney, but I’ve been writing about foreign asset protection for over a decade—I know what’s possible and what’s not. If you decide to consult with me, I can assess your needs and put you in touch with the right people.

I’ve helped hundreds of folks do these things over the years, and I can help you too.