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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3039
Experience:  I've prepared all types of taxes since 1987.
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I am a Thai citizen living in Thailand and am interested in

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I am a Thai citizen living in Thailand and am interested in investing in a u.s. LLC which buys apartments in Portland, Oregon, carries out renovation and improvements on the facilities, thus increasing rental revenue and at the end of five year period, will sell the property at a mark-up.

Could you tell me what is my tax liability if I were to invest say $100K in the company? The investment will generate about 9% annual dividend income on average. There is a projected capital gain of 50% at the end of the 5-year horizon. I don't have other sources of income in the u.s. apart from this investment. What is the applicable tax rule in my situation (1040NR, FIRPTA, etc.)? What is the appropriate witholding tax amount in my case (30% for foreigner, or 15% due to tax treaty between Thailand and the U.S., or "effectively connected income" rule which calls for regular income tax rule, etc.)? Since the investment is longer than 1 year, I wonder if it qualifies for the long-term capital gain tax rate? What is the current view among tax experts on changes in tax rates during Obama's second term (is the change likely to become effective before the fund closes out in 5-year time)?
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.
Greetings,

A pure guess is that the capital gain rate is likely to be about 20% in the future. Anywhere from the current 15% to about 25% is possible.

Even though this is an investment, the organization of the LLC may be important in determining if this is effectively connected income (ECI) or not. The default for a multiple member LLC is taxation as a partnership but an election can be made to be taxed as a corporation.

You generally must be engaged in a trade or business in the United States during the tax year to be able to treat income received in that year as ECI. You usually are considered to be engaged in a U.S. trade or business when you perform personal services in the United States. If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States.
So, if the LLC is taxed as a partnership the income will be ECI as will be the gain on the sale of the partnership interest.

ECI is, after allowable deductions, taxed at the graduated rates that apply to U.S. citizens and resident aliens.

Non-business or FDPI (Fixed or Determinable Periodic Income) means investment income such as interest and dividends from publicly traded stocks, securities, commodity futures, options etc. and is usually taxed at a flat rate of 30% on a gross basis (without deduction.
A non-resident alien with only US investment income usually does not have to file a US tax return as long as the 30% tax is withheld from the source. If the LLC elects treatment as a corporation and dividends are paid the income may be FDPI for you a foreign investor that does not provide services.

A U.S. partnership that allocates income to a foreign partner faces multiple sets of rules for withholding of federal tax. For more information see the article at http://www.nysscpa.org/taxstringer/2012/april/booth.htm
"The timing on ECI withholding follows rules similar to those for the estimated tax payments for corporations. Payments must be made quarterly with Form 8813."

Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business; so regular income tax rates will apply to any disposition of real property.

Please ask if you need clarification or more discussion.
Thank you.


Customer: replied 1 year ago.

Hi Jgordosea:

 

Thanks for the information. It is very helpful.

 

The LLC elects to file as partnership. I have some follow-up questions:

 

 

1. I expect about 9,000usd dividend annually. I have no other income. I am single. What is my marginal tax rate after standard deduction?

 

2. I will make 50,000usd on capital gain at the end of the 5th year, assuming 50% property appreciation based on an initial 100,000usd investment. I will be taxed as if I am engaged in a trade or business in the U.S. What is the rough estimate on my tax liability? What will be my marginal tax rate in the 5th year? Please include the 9,000usd dividend income as well.

 

3. What tax form do I need to file for my own personal income on April 15th (1040NR or 1040EZ)? What other forms do I and the LLC need to file with the tax authority?

 

4. Could you please recommend someone who can file the returns for me in the future and talk to my LLC to establish filing requirements at the outset? I am looking for a cost-effective solution. What is the going-rate for this kind of task?

 

Thanks again for the help. I willl give very high rating for the quality of your responses.

 

pichetzh"at"gmail.com

 

 

 

 

Expert:  jgordosea replied 1 year ago.

Hello again,

 

4. Sorry, but we can not make recommendations of firms or individuals. One source to search by location is Find an Enrolled Agent at https://portal.naeacentral.org/webportal/buyersguide/professionalsearch.aspx

Rates vary widely so a quote should be obtained when engaging a practitioner.

 

3. Form 1040NR or 1040NR-EZ is used by a nonresident alien. Partnership filing is another question, but as mentioned Form 8813 will be filed by the partnership for the withholding. From the description, Form 1040 NR-EZ can be used according to the instructions at http://www.irs.gov/pub/irs-pdf/i1040nre.pdf or http://www.irs.gov/uac/Form-1040NR-EZ,-U.S.-Income-Tax-Return-for-Certain-Nonresident-Aliens-With-No-Dependents

 

2. For 2013 the scheduled tax rates for a single person are

15% for taxable income up to $36,250 and 28% for taxable income of 36,250 to 87,850.

 

 

1. There is no standard deduction allowed for a nonresident alien but an exemption amount is subtracted to determine taxable income. For 2011 this was $3,700 and for 2012 this amount is $3,800 and is indexed for inflation so can rise year to year.

 

 

Marginal rate should be 15% when only $9,000 per year is received and 28% when $59,000 is received; but this is subject to change by Congress.

 

Hope this clarifies for you.

You can include my name in another question to request my attention.

Thank you.

 

 

 

 

 

 

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3039
Experience: I've prepared all types of taxes since 1987.
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