I met with my new accountant last week, who is meant to know his stuff regarding property.
He advised me that even after applying double tax agreements, their client was getting taxed at an effective rate of 66% between USA and Australia when they used the online system.
Can anyone advise what tax rates they are actually paying and suggested structures to avoid this?
If the actual taxes are even close to this high, it makes it a poor investment, even if the gross returns are strong.
Thanks,
MattMatt, you’ve asked some interesting questions. I’ll private message you with a statement made by an accountant whom I wrote to recently…
i would be keen to see that info as well if you dont mind nyc
I would love to hear what you have to say also. Thanks.
mattnz wrote:I met with my new accountant last week, who is meant to know his stuff regarding property. He advised me that even after applying double tax agreements, their client was getting taxed at an effective rate of 66% between USA and Australia when they used the online system. Can anyone advise what tax rates they are actually paying and suggested structures to avoid this? If the actual taxes are even close to this high, it makes it a poor investment, even if the gross returns are strong. Thanks, MattHi Matt
This does not make any sense to me whatsoever. If this were the case, who the hell would bother buying properties in US.
I have been in consutlation with an accountant who deals with US tax side and my accountant in Perth has also confirmed there is an agreement in place where you do not pay double tax, you actually get tax credits that is if you pay tax in US.I will not be paying tax in US as my structure will involve loans against LLCs. I will pay 10% with-holding tax in US on interest only, so the idea is if you personally lend money, ie 500K to your LLC to purchase properties you personally charge interest at 10% which means you will pay $5000 (with holding tax in US).
The idea is the interest on loan wipes out the income in US.
Please make sure you check out your particular situation with your US/Aus accountant, as obviously everyone's financial position will differ.
Hi Stu82, Sall94 and WorldInvestor,
The US-based accountant said that many countries recognize an LLC as a “corporation” for tax purposes – while the United States recognises it as a look-through entity. In situations involving many other countries using an LLC can raise the worldwide effective tax rate of the investor to more than 55% when compared to something more traditional, like a US limited partnership.
WorldInvestor, again, thanks for sharing – I find your structure involving loans against LLCs interesting. May I ask you some questions using the $500k loan scenario to an LLC, if it okay:
Lets us assume you have personally lent $500,000 to your single-member LLC and that you have purchased seven properties (spending approximately $71,000 for each property). You personally charge interest at 10% – this amounts to $50,000 per annum. You pay withholding tax in the US on interest only, which is $50,000 x 10% = $5,000 pa.
If you have seven properties in the US (for simplicity, lets say, in Atlanta) with each property yielding a net income of $5,500 pa after all expenses have been taken into account but before the interest charges of 10% is applied (yes, I am being conservative here about $5,500 pa net income per property). Seven properties multiply by $5,500 pa = $38,500 per annum.
So WorldInvestor, as you saying that as a consequence of applying the interest charges, in this example, the properties will be negatively geared by $11,500 (that is $38,500 – $50,000 = $11,500)?
If the above is correct, then no US tax is payable, and the tax loss of $11,500 incurred on the US tax return can be deducted from the person’s Australian gross total taxable income.
If you pay withholding tax of $5,000 on the interest charges on your US tax return, you could claim this amount as a tax credit against tax payable on the Australian tax return, couldn’t you?
Thank you for your time.
nyc88 wrote:Hi Stu82, Sall94 and WorldInvestor, The US-based accountant said that many countries recognize an LLC as a “corporation” for tax purposes – while the United States recognises it as a look-through entity. In situations involving many other countries using an LLC can raise the worldwide effective tax rate of the investor to more than 55% when compared to something more traditional, like a US limited partnership. WorldInvestor, again, thanks for sharing – I find your structure involving loans against LLCs interesting. May I ask you some questions using the $500k loan scenario to an LLC, if it okay: Lets us assume you have personally lent $500,000 to your single-member LLC and that you have purchased seven properties (spending approximately $71,000 for each property). You personally charge interest at 10% – this amounts to $50,000 per annum. You pay withholding tax in the US on interest only, which is $50,000 x 10% = $5,000 pa. If you have seven properties in the US (for simplicity, lets say, in Atlanta) with each property yielding a net income of $5,500 pa after all expenses have been taken into account but before the interest charges of 10% is applied (yes, I am being conservative here about $5,500 pa net income per property). Seven properties multiply by $5,500 pa = $38,500 per annum. So WorldInvestor, as you saying that as a consequence of applying the interest charges, in this example, the properties will be negatively geared by $11,500 (that is $38,500 – $50,000 = $11,500)? If the above is correct, then no US tax is payable, and the tax loss of $11,500 incurred on the US tax return can be deducted from the person's Australian gross total taxable income. If you pay withholding tax of $5,000 on the interest charges on your US tax return, you could claim this amount as a tax credit against tax payable on the Australian tax return, couldn't you? Thank you for your time.These calculations need to be based on properties that have returns close to 20% gross.
At a 20% gross they should net out (before interest and tax) at about 12%. This works out to 40% for expenses.
So on a rent of $1200 pm or 14400 pa gives a net of $8640 X 7 = $60480.
If you end up with losses then I think you will start to attract unwanted attention.
The loan agreements need to be able to alter the % interest charged to adjust for the eventuality that there is a greater or lesser net income.
Yes you are right that the interest witholding tax is credited to you in Aust.
nyc88
I believe usainvestor has pretty much summed up my strategy.I did forget to mention an important fact that 10% with holding in tax deduction in Australia.
We will alter % interest charged as required.
My goal is not to pay any tax in US.
Will this strategy pass the ATO test that the structure is set up to primarily minimise tax? Sounds unlikely. Or perhaps they don’t care as it is IRS that misses out?
mattnz
what has it got to do with ATO??
Nothing illegal about setting up loans which are legitimate at market interest rate, try lending from money lender 12%, I will lend to my LLCs at 10%.
At the end of the day I am not a tax accountant or lawyer, I have set up structures and paid $ to ensure that it works for me. This is just an overview on my strategy, obviously you need to seek professional help for your own circumstances.
No point investing in US if you aint got any money in the bank.
By the way, good news for investors bringings the US $ back home, am now in the process of doing this, quite exciting my plan was always to wait for Aus $ to drop, lets see how low it will go.
The way I plan to set things up, I would need to lend at 25-30% to my LLC, which may raise a few eyebrows.
Good luck, try explaining 25-30% interest in US as market rate???
Worldinvestor is on the money.
You don’t pay double tax.
Whatever you pay in tax on US soil, you will pay the balance owing in Australia.
e.g.
1. If you earn $10,000 in rental income in the U.S. (you would be classified in the 15% tax bracket)
2. You will pay 15% tax to the IRS.
3. If you are on the 30% tax bracket in Australia, you will declare $10,000 in foreign income. Because you have already paid 15% of that foreign income to the IRS, the ATO will only require you to pay the remainder 15% to them thanks to our USA-AUS Tax treaty.
This is how I have been paying my taxes on an annual basis. Obviously if you have the standard interest, travel, maintenance, management, depreciation, deductions etc. you will reduce your tax owing significantly
As a foreign investor, you will receive your ITIN upon lodging your very first US tax return if you haven’t already applied for it prior to lodging.
ITIN comes in handy if you have a US bank account and you are trying to wire money across the United States. It gets a little tricky for foreigners to do this without a bank manager approval.
There are loopholes for this like billpay etc. but probably not the right thread to share this information
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