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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 322
Experience:  Tax Accountant at Praxair, Inc.
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U.S. LLC "owned" by two foreign individuals as the only

Customer Question

U.S. LLC "owned" by two foreign individuals as the only members. LLC owns 3 rental properties worth 250K each.
1. One member dies. What are the inheritance tax issues e.g. is the Federal Estate Tax Exemption of 5+M limited to a smaller deduction;
2. Can that member gift some or all of his membership to a family member who is a foreigner during the member's lifetime, if so, what are the gift or other tax issues; and
3. Are capital gain rates available for profits on the sale of the properties and/or the membership; and
4. May the LLC use 1031 Deferred Exchanges.
Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Jonathan Tierney replied 1 year ago.

Hi, my name is ***** ***** I can help. 1) The executor of a nonresident alien's estate is required to file Form 706NA is the nonresident alien (NRA) has more than $60K in US-situated assets such as real estate so a estate tax return would need to be filed if one member dies. Unfortuneately, nonresident aliens are not eligible for the $5 million (plus indexed amounts for inflation) lifetime exemption estate and gift tax so there would be an estate tax due for if the NRA has US-situated assets of more than $60K at the time of death, which would be the case here assuming one member does not own more of the LLC than the other. Furthermore, as the real estate taxes are held in a LLC, the estate could claim a "marketability" discount. So if the properties are worth $750K total and each one own 50% then the estate would be valued at $375K less say a 15% discount so the LLC interest could be valued at $693,750. The amount of the "marketability discount is set in stone but varies based upon the situation and courts are sometimes divided over the appropriate discount. The heirs of inherited property receive the property at its fair market value at the decedent's time of death so in the situation mentioned the heirs would receive a $693,750 basis in the LLC which would reduce any capital gains tax if the property is sold.

2) NRA are eligible to make gifts during their lifetime and can take a $13K per year per person exclusion. A Form 709 gift tax return is not required for gifts less than $13K, but since an LLC interest does not have a readily determinable fair market value, it is usually best to file (especially is a marketability discount is taken) one as it will start the statute of limitations on the valuation of the gift, whereas if no return is filed the IRS will always be able to try to change the gift valuation.

3) NRA selling US real estate are subject to FIRPTA withholding to ensure taxes on capital gains are paid, which is now 15% of the gross proceeds of the sale. See here and the attached Publication 515 for more information. The NRA can file a 1040NR and recieve a refund of any excess withholding.

4) The LLC may participate in a 1031 deferred exchange, though the replacement property must be located in the US.

I hope this answers your question. Please let me know if I can clarify anything or answer any additional questions.

Thanks, Jonathan

Expert:  Jonathan Tierney replied 1 year ago.

Sorry the basis partnership interest to the heirs would be $318,750 in the above example, I copied the wrong number from my spreadsheet.