by Arizona real estate attorney Richard Keyt
This website is to help non-U.S. citizens (other than Canadians – see below) who are not U.S. residents (called “nonresident aliens” by the Internal Revenue Service) to understand the legal issues of investing in U.S. real estate and how I solve those issues. This site also explains why and how real estate investors (other than Canadians) should always form a limited liability company (“LLC”) to purchase and hold U.S. real estate. The reason it is prudent to own all U.S. investment real estate in an LLC is to protect the investor from debts and liabilities that can arise from the property. The person who owns U.S. real estate in his or her name is liable for every thing that goes wrong with the investment.
Note for Canadians: Canadians should form a U.S. limited partnership to own U.S. real estate.
Before July 1, 2014, we represented many Canadians who formed limited liability partnerships to purchase U.S. real estate. Due to the Canadian Anti-Spam law that took affect on July 1, 2014, we are unable to communicate with, send email messages to or provide legal services for a Canadian citizen or any person or entity that resides in Canada. We are sorry, but the penalty for a business that violates the Canadian anti-spam law is $10,000,000 per violation.
One of the biggest risks associated with owning U.S. real estate is that a tenant or visitor is killed or injured by something on the property or by a defect in a structure (for example the gas water heater blows up or old electrical wiring causes a fire). For real life examples of multi-million jury awards against property owners read “Arizona Jury Gives Volunteer Worker Injured in a Fall from a Ladder $5.9 Million“and “Arizona Damage Awards in Premises Liability Cases.”
Two Must Read Articles for Non-US Citizens Considering Investing in U.S. Real Estate
We have tons to information about nonresident aliens investing in U.S. real estate and nonresident alien tax consequences arising from the investments and hope you have the time to study our web site in depth. However, if you are pressed for time we urge you to read our two most important articles for foreign investors who are considering buying real property in the United States. Please read:
Form an Entity to Own U.S. Investment Real Estate to Protect the Owners from Liabilities arising from the Property
In the United States smart people do not own investment real estate in their own names because if anything goes wrong on the property and somebody is killed or injured and there is a lawsuit judgment that exceeds the amount of insurance coverage, all of the owner’s life savings could be lost. See my articles called “How LLCs Protect Your Life Savings” and “Asset Protection Rules for Real Estate Investment.” For asset protection, owners of U.S. real estate should put the property into an entity that protects the owners from liability. The best entity to own real estate in Arizona and most other states is the limited liability company (LLC) for everybody except Canadians who should use a limited partnership (LP).
The general rule of Arizona law is that the owners of an Arizona LLC and the limited partners of an Arizona limited partnership are not liable for the debts and obligations of the entity. For maximum asset protection, you should always own U.S. investment real estate in an entity that protects the owners from liability. If something bad happens on the property, the defendant in the lawsuit will be the entity that owns the property.
Insurance is the first line of defense and real estate owners should always buy the types of insurance that is appropriate for the type of real estate and get as much coverage as they can afford. The second line of defense is the LLC or LP.
Summary of Steps to Purchase U.S. Real Estate
The following is a summary of what a nonresident alien must do to purchase U.S. real estate through an LLC or LP:
1. Find the desired real property.
2. Form an Arizona LLC (an LP for Canadians) to be the buyer on the proposed purchase contract. To hire Arizona LLC attorney Richard Keyt to form an Arizona LLC, submit my online Arizona LLC formation questionnaire. One way to incur potential liability is to be the buyer on a purchase contract. Rather than you being the buyer and incurring the risk of being sued for breach of contract, let your LLC or LP be the buyer so it is the defendant in the breach of contract lawsuit, not you. If you are the buyer on the contract, be sure to include a clause in the purchase contract that gives you the right to assign the buyer’s rights to an LLC or LP that you form.
3. Obtain a federal employer identification number (EIN) for the LLC or LP. The entity will need the EIN to open a bank account in the U.S.
4. Submit an offer to purchase in the form of a contract. As real estate attorneys, we recommend that the contract be reviewed by a real estate attorney licensed to practice law in the state where the real property is located. If you need an Arizona real estate attorney to prepare or review contracts to buy, sell or lease any type of Arizona real estate, contact Arizona real estate attorney Richard Keyt at 480-664-7478 or send him an email at email@example.com. To learn more about Arizona real estate law, see Richard’s website called “Arizona Real Estate Law.”
5. Include language in the purchase agreement that gives the buyer the right to conduct due diligence, including reviewing the title, and canceling the contract for any reason if the investigation of the property turns up any problems.
6. When the contract is signed, conduct a comprehensive due diligence investigation of the property before the last day on which to notify the seller that the buyer cancels the contract.
7. Open a checking account with a U.S. bank in the name of the entity. For a person who is in the U.S., he or she can easily open a checking account by giving the bank: (i) proof of identity such as a passport, (ii) a copy of the Articles of Organization filed with the State of Arizona to form the entity, and (iii) the entity’s EIN. If the owner of the entity is not in the U.S. to open the bank account in person in the bank’s office, U.S. laws may require the non-U.S. citizen to jump through some additional hoops to open the entity’s bank account.
8. Prepare and sign an IRS Form W-8ECI or W-8BEN. The nonresident alien investor gives this signed form to the property manager of the real estate and the entity’s bank. For more on this topic read “U.S. Law Checklist for Foreign Investors Buying U.S. Real Estate.”
9. Get an ITIN request letter from a U.S. bank or the property manager. Nonresident aliens must obtain an Individual Taxpayer Identification Number (“ITIN”) from the IRS. This number goes on the nonresident alien’s U.S. tax return, IRS Form 1040NR. Normally the nonresident alien applies for an ITIN concurrently with filing his or her first U.S. income tax return. Because the first tax return can be filed as long as 2 years after the real estate is purchased we recommend that the investor get an appropriate letter from his or her U.S. bank or the property manager of the LLC that will allow the investor to apply for and obtain an ITIN as soon as possible after forming the entity that owns the U.S. real estate.
10. Apply for and obtain an ITIN. The ITIN is needed to file the first nonresident alien tax return. Get the ITIN as soon as possible because you may need it for other purposes before you file your first U.S. nonresident alien tax return.
11. If you form an Arizona LLC or LP and it purchases real property in another state, it may or may not need to register to do business in the other state. For more on this topic, see “Registering an Arizona LLC to Do Business in Another State.”
As you can see there are a lot of legal issues that arise from investing in United States real property. Nonresident aliens investing in hire us to navigate through the legal quagmire of investing in U.S. real estate.
Non-U.S. Investors Who Own 10 Percent or More of a U.S. Company Must File an Annual Report with the U.S. Department of Commerce, Bureau of Economic Analysis
All U.S. business enterprises in which a foreign person owns 10% or more of the voting interest are subject to annual BEA reporting requirements unless an exemption applies. This includes foreign ownership of real estate, improved and unimproved, except residential real estate held exclusively for personal use and not for profit making purposes. Learn more at “Bureau of Economic Analysis Annual Reporting Requirement.”
For More Information About Limited Liability Companies
This website was created by Arizona business and entity formation attorney Richard Keyt who has formed 6,700+ LLCs and been practicing law in Arizona since 1980. Richard has written may articles about forming and operating different types of entities. To learn more about LLCs, see Richard’s website called “Arizona Limited Liability Company Law.”