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ScottyMacEsq
ScottyMacEsq, Attorney
Category: Legal
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Experience:  Licensed Texas General Practice Attorney
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Dears, Im an alien (non USA) resident with property in USA

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Dears, I'm an alien (non USA) resident with property in USA (Chicago, Ilinois) which I have just purchased. Property will be rented through management company (Chicago IL) and will generate income. Funds will go on trustee account with management company. I'm wondering if it would be better to establish LLC to limit personal liability and for tax purposes. Another question is whether to establish LLC in Ilinois where the property is or in any other state like Wyoming, Delaware where taxes on income are lower -I suppose? Thank you, Matt
Submitted: 11 months ago.
Category: Legal
Expert:  ScottyMacEsq replied 11 months ago.

ScottyMacEsq : Thank you for using JustAnswer. I am researching your issue and will respond shortly.
ScottyMacEsq : Congratulations on your investment. If you don't have any other properties or income in the US, it really doesn't make that much of a difference if you have it in an LLC or not. The reason is that international collection is very difficult. Now if you plan on becoming a citizen or US resident and residing (and working) in the US in the future, an LLC would be a better plan.
ScottyMacEsq : As for where you form it, you would have to pay taxes where the income is generated. That's unavoidalbe.
ScottyMacEsq : *unavoidable
ScottyMacEsq : The reason that companies will choose Wyoming, Nevada, or Delaware is often for the other reasons (costs involved, privacy, beneficial laws, etc...)
Customer: Hi Scotty, thank you. However I got some advise that LLC might be good decision to limit liability
ScottyMacEsq : And while you don't have to pay income taxes there, you are going to have to pay where you generate that income, so unless you're convinced by the other factors (i.e. privacy) it probably would not make much sense to have it outside the state.
ScottyMacEsq : Understood. The liability would be limited to the assets and income of the LLC if the property were in the LLC.
ScottyMacEsq : If it were in your name, they could sue you personally and go after any assets that you have.
ScottyMacEsq : What I was saying is that it's almost impossible to go after assets that you have outside the US.
ScottyMacEsq : So while an LLC limits liability, COLLECTION on a judgment might be exactly the same (i.e. the house as the only property that you have in the US)
ScottyMacEsq : International collection is so expensive that if there is a judgment under $100,000 - $200,000, it's often not even worth it to pursue.
ScottyMacEsq : That's why I said that if this property is your ONLY property in the US, then it probably wouldn't make any difference whether you had it in an LLC or not.
ScottyMacEsq : (from a liability perspective)
ScottyMacEsq : But if you have other assets, then it would make more sense to keep it in an LLC)
ScottyMacEsq : Limited liability companies are all about asset protection, and it depends on the assets that you have.
ScottyMacEsq : The assets of the LLC (such as the property itself) could be subject to a judgment, so an LLC would not protect the property or other assets of that LLC, but it would protect your personal assets.
Customer: For now I have only this property but if good environment than I would purchase 2nd one.
ScottyMacEsq : (but if those personal assets are outside the US, only if the liability is substantial would anyone consider pursuing it).
Customer: yes other assets outside US
ScottyMacEsq : And if your future plans include multiple property purchases, then it would make more sense to have an LLC, certainly. But that's also something that you can do at a later point (seeing how it goes). You don't have to put the property in the LLC right now.
ScottyMacEsq : Remember that an LLC costs money, so you want to make certain that it is beneficial for you (that is, the benefits outweigh the costs).
ScottyMacEsq : While an LLC limits liability, that needs to be considered primarily against the property that is in the US. Property outside the US is extremely difficult for a creditor to get to (like I said above).
Customer: o.k. I understand. But am I taxed the same as US citizen or LLC if I keep property in my name? What would be the tax and are all costs deductable?
ScottyMacEsq : Believe me, I'm not trying to steer you away from forming an LLC. Most of the time I suggest it. But your case is fairly unique, in that this is your only property, and if it were me, this is a rare situation where I would believe that the costs actually outweigh the benefits.
ScottyMacEsq : You're going to be taxed the same.
ScottyMacEsq : Costs are deductible, yes.
ScottyMacEsq : An LLC is a good structure if there will be multiple owners though...
Customer: do I need accountant or is management company responsible for reporting?
ScottyMacEsq : Or if you want to be able to pass ownership easier to friends / family...
ScottyMacEsq : I would absolutely get an accountant whichever structure that you choose.
ScottyMacEsq : The reason is that if you're not present to manage the affairs, as well as not knowledgeable in tax reporting, etc.. then it could be easy to mess things up..
ScottyMacEsq : (and if that happens, there could be additional liability, and the point of an investment is profitability, not losing money)
Customer: Can you confirm costs for establishing LLC (cca 400-500 USD?)
ScottyMacEsq : Yes, that's the standard fee for an Illinois LLC.
Customer: I think every year there is some extra fee to extend LLC
ScottyMacEsq : Yes.
ScottyMacEsq : And another practicality: there needs to be some "nexus" to the state that you form the LLC in. For companies that involve goods and services and shipping to other states, you can say that you "may" sell to customers in that state.
ScottyMacEsq : But it's much more difficult with rental property, in that property in Illinois does not have much (if any) nexus to any other state than Illinois.
ScottyMacEsq : As a practical matter, that could have the effect of being an "alter ego" company (basically making the LLC worthless and still having personal liability on that property)
ScottyMacEsq : So if it were me, I would only form in Illinois. Now if you have a company that sells stuff online, or services to other states, that could be a situation where a NV or WY LLC might make sense.
ScottyMacEsq : But not for a rental property fixed in Illinois.
ScottyMacEsq : The annual fee in Illinois is $250 per year.
Customer: Yes I thought so. In addition I have insurance policy with liability coverage of 300K
ScottyMacEsq : Again, when the idea is to make money and not spend it, if I were in your situation, I would hold off on doing this unless it really made sense (i.e. multiple properties and/or assets in the US where they're subject to relatively easier collection laws).
ScottyMacEsq : And that's a good thing to have.
Customer: o.k. thx - now there is another thing why I thought LLC would be more appropriate - Europe and USA have double taxation treaty - to avoid double tax for residents. However I don't know if I must pay USA tax or am I exempt for paying USA tax
ScottyMacEsq : You would need to pay US tax as that would be based on income earned in the US.
ScottyMacEsq : You would be able to offset what was paid in the US against what would otherwise be owed in Europe (per that treaty)
ScottyMacEsq : An LLC is a "pass through" tax entity, so it's not the LLC that has the liability, but you personally.
ScottyMacEsq : You could elect to have it taxed as a corporation, but there's REALLY no reason to do that (as it would increase your taxes another 10% or so)
Customer: o.k. so it means If I pay 16% tax (as individual or LLC) in USA. The difference to 25% should be paied localy in Europe (Slovenia)
ScottyMacEsq : Yes, in that hypothetical... If the tax paid in the US is higher than what would be owed in Slovenia, then you wouldn't owe anything there.
Customer: I wouldn't like to have too much administration and our local tax siytem is very complicated.
Customer: So I wouldn't get return in Slovenia if I woud have paied more in USA
ScottyMacEsq : I don't know about Slovenia tax rules, so I can't say for certain. Typically you DO have to report the income, but you also report the taxes that you have paid, so you take the credit, and at the end you show that you don't owe anything more.
Customer: I have read the treaty and it is not very clear. I understood it as the tax for USA residents as well as for Slovenian residents are definitive.
ScottyMacEsq : Was that a question?
Customer: LLC pass through mean that person who acts in LLC's name must pay income taxes?
ScottyMacEsq : The owners, yes.
ScottyMacEsq : The owners get income from the LLC, and pay taxes on it.
ScottyMacEsq : (and take the deductions_
Customer: Yes I understand. So USA would report Slovenian authorities about my income in USA whether I owe property as individual or whether I have LLC on property?
ScottyMacEsq : USA wouldn't report the income (most likely).
ScottyMacEsq : Rather you would have an obligation to do that yourself.
ScottyMacEsq : It's possible that they never would find out if you don't, but you likely have a legal obligation in Slovenian law to do so.
Customer: yes world income...
Customer: I thought I would have more clear things with LLC. So is sth is payed in USA and taxes in USA it should stay there.
Customer: But I guess I was wrong??
ScottyMacEsq : "So is sth is payed in USA and taxes in USA it should stay there. " I don't know what you mean by that...
ScottyMacEsq : Since an LLC is a pass through entity if you elect to have it taxed that way (which is what you would want) you would need to file a personal income tax return. Having an LLC does not make things easier.
Customer: It means that If I buy property in USA, get income in USA, pay taxes in USA, Slovenia has nothing to do with it.
ScottyMacEsq : It does protect assets if you have other assets in the country or substantial liability (such that international collection would be financially viable).
ScottyMacEsq : Yes, unless you have a legal obligation to report and pay taxes on income earned globally in Slovenia. Per the tax treaty you can take a credit for what you pay abroad, but legally you likely have an obligation in Slovenia as well.
ScottyMacEsq : So it'
ScottyMacEsq : So it's not as though they have "nothing" to do with it.
ScottyMacEsq : But it's tangential and subordinate to what the US has to do with it.
Customer: yes I understand.
ScottyMacEsq : If there's nothing else, please rate this answer. Please note that I don't get any credit for the time (~40 minutes) and effort that I spent on this answer unless and until you rate it a 3, 4, 5 (good or better). If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!
Customer: Scotty, one thing more - how is income taxable in IL (10-20%)?
ScottyMacEsq : That's variable based on income. I would suggest using the following site to calculate estimated taxes based upon the income: http://www.tax-brackets.org/illinoistaxtable
ScottyMacEsq : (for federal and state, of course)
ScottyMacEsq : Illinois tax is a flat 5%
Customer: O.k. so you think If US income tax is 5% and Slovenia is f.ex 8% the difference is taxed localy or no tax as double taxation treaty is concerned. Please note Slovenia is EU same as Germany, UK and has practically same law on taxation, except % are a bit different.
ScottyMacEsq : No, Illinois STATE tax is 5%.
ScottyMacEsq : Federal tax is separate and additional.
ScottyMacEsq : (and that's based upon the amount of income)
ScottyMacEsq : But if you were to only pay 5%, and Slovenia is 8%, you would pay the other 3% in Slovenia (rather than a total of 13%
ScottyMacEsq : But you're almost certainly not going to just have to be 5%
ScottyMacEsq : http://www.tax-brackets.org/illinoistaxtable will give you an idea of what you're going to have to pay in regards XXXXX XXXXX and state taxes.
Customer: so we talk about income tax. I've heared of federal tax and state tax concernng property tax
ScottyMacEsq : Property tax is separate, owed to the state (no property tax in Federal law), and you can take a deduction on your federal taxes for property tax paid.
ScottyMacEsq : We're talking about INCOME taxes, which is based upon income received in the state and in the US.
ScottyMacEsq : Property taxes won't be avoidable, are state taxes, and probably wouldn't be subject to the treaty.
ScottyMacEsq : That's incidental to having property in the state.
ScottyMacEsq : I hope that clears things up. If there's nothing else, please rate this answer. Please note that I don't get any credit for the time (>50 minutes) and effort that I spent on this answer unless and until you rate it a 3, 4, 5 (good or better). If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!
Customer: I am satisfied with the answers. really the last thing to ask: can I apply for property tax appeal and is the income going to go on top of property value. Do you have any contacts or Attorney who you can recommend in IL?
ScottyMacEsq : Absolutely you can do that as the owner of the property.
ScottyMacEsq : Unfortunately I cannot recommend any attorneys per the terms of service of this site.
ScottyMacEsq : I would suggest contacting the local bar association for a referral in the area.
ScottyMacEsq : Again, I do wish you the best of luck in your investment. If there's nothing else, please rate this answer. Please note that I don't get any credit for the time (~1 hour) and effort that I spent on this answer unless and until you rate it a 3, 4, 5 (good or better). If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!
Customer: bar association?
ScottyMacEsq : Yes. The "bar" is an organization of attorneys.
ScottyMacEsq : The State Bar licenses attorneys.
ScottyMacEsq : Local bar associations are more for other reasons (committees, training, etc...)
ScottyMacEsq : Do a web search for the city (or nearest large city) and "bar association" and it should come up.
Customer: o.k. thank you for explanation, take care (I see this will be $63) you deserve it. Satisfied eith answers.
ScottyMacEsq : My pleasure. If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!
Customer: o.k thanks
ScottyMacEsq, Attorney
Category: Legal
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Experience: Licensed Texas General Practice Attorney
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