Podcast - U.S. Real Estate Tax Planning for Global Families

Shawn Amuial: I'm Shawn Amuial. I'm a real estate partner at Holland & Knight in Miami, and today I am joined by two of my partners in our Private Wealth Services Group, both whom I lean on quite frequently. Logan Gans and Sean Tevel, welcome. So I'm going to hop right into some quick intros. Logan, you're a partner in our Private Wealth Services Group. You are the co-chair of the firm's State and Local Tax Team. You're a Florida CPA, as well as a tax lawyer, and your practice spans the entire tax spectrum: U.S., federal, international, state and local tax, as well as a focus on opportunity zones, 1031 exchanges, pre-immigration planning and Florida-specific issues like doc stamps. Does that capture at all?

Logan Gans: Yes, our clients in Florida tend to have multiple needs, especially for very complicated real estate structures.

Shawn Amuial: Sean, you're a partner in our Private Wealth Services Group as well, and an international tax attorney. You advise foreign and domestic clients on federal income, gift and estate tax issues tied to cross-border investments. You help with structuring U.S. real estate funds with a heavy emphasis on Foreign Investment in Real Property Tax Act (FIRPTA), fund formation for non-U.S investors and treaty planning. Anything I missed there?

Sean Tevel: No, that's pretty much it. Thank you so much, Shawn. And beyond that, just generally our group in general helps often with not just on the international side, but on the domestic side, maximizing tax benefits and essentially taking advantage of the real estate-favorable tax laws that have been put in place over the last few years.

Shawn Amuial: So from my side, I'm a real estate lawyer. I represent commercial developers, family offices on acquisitions, dispositions, joint ventures, financing and leasing, which means, like I mentioned at the top, I am constantly leaning on Logan and Sean, because as we all know, and we'll find out more about shortly, getting the tax structure wrong at acquisition is something you feel throughout the life of the asset. So with that, we will jump right into the first segment. Sean, I'm going to launch the first question at you. The surprise tax, right? The two words no one likes to hear together. In your cross-border practice, what's the biggest surprise tax global families actually run into when they invest in U.S. real estate?

Sean Tevel: I think the biggest thing that we come across often in Miami is that every realtor seems to think that they're a tax lawyer. So ultimately, when we're meeting with clients, what we try to figure out for them is one, what's the most efficient way for them to earn their income with respect to the property, which can consider what their intended use for the property is, how we can minimize any FIRPTA exposure on their exit, whether they're going to be protected from the estate tax, and also another very important consideration is how that real estate investment is going to be treated in their home jurisdiction. Because the structuring could be very different if an investor is from Canada or if an investor's from Mexico. We regularly work with their local counsel or our office equivalents in Mexico to make sure that we've structured them correctly with respect to their real estate acquisition.

Shawn Amuial: All great points, many points that we'll touch on in a couple of minutes. Switching gears to Logan and focusing on, again, before we sign the contract. What are the three facts you need to know about a client and a deal before you can advise on a proposed structure?

Logan Gans: I mean, status is always important, you know, nonresident versus resident. Intended use, whether it's going to be a personal residence, rental or a development, if the case may be. Is it going to be a generational asset? Is it a hold for a few years? Is there going to be a refinance event? What are the ages of the folks? There's definitely facts we should get.

Shawn Amuial: All makes sense. In terms of holdings, there's obviously an array of different possibilities: direct hold, LLCs, blockers, REITs. Sean, when clients asked which of the variety, a REIT structure versus direct hold and so on, what are you really fishing for? What are you trying to optimize when you give them an answer?

Sean Tevel: So that's generally going to be very dependent on the client and the use for the real estate. If something's personal use versus whether something's going to be income-producing is a big consideration there. Generally most of the clients we're seeing that are the global family offices, they're either acquiring real estate for personal use in the United States or alternatively investing sort of in joint ventures or larger projects. Generally for the personal use real estate, our main focus is to make sure that there's estate tax protection if the real estate is valuable enough. We'll touch on this a bit later, but essentially if someone buys their property in the wrong structure, they have a 40 percent silent partner that's named the IRS if they pass away. So that's something that we really try to protect against. And then otherwise for income-generating properties, we try our best to structure things in a way that they play the lowest overall effective tax rate between the U.S. and their home jurisdiction, while also trying to maintain that estate tax protection, particularly for clients that are at a more advanced stage.

Shawn Amuial: So switching gears to our second segment, which is going to be focused largely on domiciles and acquisitions. Logan, domicile and situs for the audience: Why does this pair of concepts drive so much of what we do for global families?

Logan Gans: Well, because there's a lot of misunderstanding about what it means to be domiciled or not domiciled for U.S. state tax purposes. To be domiciled here, it's a facts-and-circumstances analysis, and many global families, they just don't meet the requirements. And the consequence is not well understood because if the nondomiciled individual dies, their estate tax exemption is only $60,000 versus the more well-known exemption of $15 million for domiciled individuals.

Shawn Amuial: Thank you for that. The next question, we have titled "the most common acquisition mistake." And I'll actually jump in here because it's something I think that collectively the three of us see a little too often. So on the real estate transaction side, again, not too infrequently, we'll have a client who buys first – not using our firm, of course – and then comes knocking on our door to structure later. So their entity is formed, the deed's recorded, the wire has cleared, and I get a phone call saying, hey, I've got a few tax questions. Could you connect me with your partners? And then I kick it to the two of you. So when I do send it your way, what does that look like when it lands on your desk? Sean, let me take it to you first.

Sean Tevel: Great, so I think one thing to focus on there is there is no easy way to take Florida real estate, or real estate in the United States, from a personally held structure and get it into an estate tax-exempt structure. And for that reason, having someone contact us prior to acquiring the property will almost always set up some form of blocker, whether it be a trust or a foreign entity, in between the individual and the estate tax and the piece of real estate to ensure that there's some estate tax protection. It is very difficult to structure out of a situation where a client just acquires something through an LLC. Another big issue that comes up there is that FIRPTA, which we'll touch on a little bit later, is a gross-based withholding. So even getting out of these structures in a taxable manner is very difficult to do without having some withholding taxes. And we'll touch on FIRPTA a little bit later, but really it's always much easier to plan into a structure than to fix an existing structure. With that being said, we do have some strategies that can minimize the risks as much as possible, but there's really no slam dunk that's readily available and is simple to implement. And this is where if an international family is acquiring a piece of U.S. real estate, involving qualified counsel on the front end is very helpful.

Shawn Amuial: Thanks Sean. Logan, anything to add on the state side when people skip the pre-closing conversation?

Logan Gans: You know, in Florida, we don't have a personal income tax, so real estate transfer taxes and taxes on mortgages are actually a big source of revenue for the state. So oftentimes, especially on larger transactions, there's a lot of potential exposure from both a Florida documentary stamp tax and a nonrecurring intangible tax, at least on the mortgages and then even on the transfer of the real property. There are exemptions for certain types of transactions, especially if there's already debt on the property, they can be very expensive to have to go do a restructuring, and talking to the negotiators with the lender can also be expensive.

Shawn Amuial: Understood. Diving into the third segment, FIRPTA, Sean, you touched on this before. Obviously, it is one of the first issues that we explore on any dispositions. Sean, could you give us sort of the one-minute version of FIRPTA?

Sean Tevel: Sure, so FIRPTA is essentially the mechanism under the Internal Revenue Code that taxes non-U.S. people on dispositions of U.S. real estate. So essentially, if the structure's not put in place properly, there's a 15 percent withholding tax with a minimal exemption that applies on a gross basis. So a fact pattern I like to use is if someone were to buy a condo for a million dollars and sell that condo a year later for $1 million, the IRS would withhold $150,000 on that sale, unless an exemption certificate was applied for, which could be a bit of an arduous process. So it is something that non-U.S. persons don't often think about. And they often think if there'll be withholding tax, it'll be with respect to my income that I've made on the property. But the fact that FIRPTA is a gross-basis withholding creates some headaches for clients. If there was an example of someone selling something in January of 2026, they may only be able to get a refund for that withholding tax the next year in 2027. So it's something that we really try to plan for and make sure that we might interpose, let's say, a U.S. partnership or a U.S. LLC taxed as a partnership to minimize that withholding obligation. But it is something that we generally plan around and try to make sure that our clients are not stuck paying that 15 percent gross-basis withholding unless their income tax on the sale actually exceeds that 15 percent.

Shawn Amuial: Continuing to focus on the exits here. Logan, anything you want to add there?

Logan Gans: Yeah, it could be one of those things that you could be a buyer and the seller is a nonresident and FIRPTA is an obligation on you and it's additional paperwork. It might be involving an accountant. If there's a withholding certificate, that's a whole process Sean had alluded to that could take a long time. There's also the need potentially to additional Employer Identification Numbers or EINs. And the IRS has very limited exemptions for FIRPTA transactions. And typically in Miami, a million-dollar exemption or $300,000 exemption doesn't go far. So it's one of those things that we always want to make sure that we're ahead of it, whether we're buyer or seller.

Shawn Amuial: Heading into our fourth and final segment, we're going to focus on state and local taxes and opportunity zones. So Logan, you co-chair the State and Local Tax Team here. Let's start with SALT. So when a global family is choosing between Miami, New York, LA, Chicago and so on, why should state tax be a part of [the] site selection conversation and not something to think about after?

Logan Gans: Because at the end of the day, state and local tax exposure can be significant. While we don't have a personal income tax in Florida, we do have ad valorem taxes. There's a lot of discussions in terms of what potential changes there might be in ad valorem tax rules. That's a podcast in itself. Obviously we've alluded to the transfer taxes on deeds and also potentially taxes on mortgages. New York has also significant transfer taxes and also mortgage taxes as well as personal income taxes. And then California, it has plenty of tax issues as well. So a client always needs to know about the jurisdiction before getting involved and definitely do some diligence before wiring money an escrow account.

Shawn Amuial: So continuing to focus on Florida, and I think [the] three of us have certainly seen this a lot recently, which is, global client invests heavily in Florida and ends up relocating personally after they've invested. That's the point at which we start getting phone calls regarding establishing state residency and so on. What do people get wrong there in terms of the order of operations or things that they could have planned better for ahead of time?

Logan Gans: Well, residency planning is always an interesting topic, and it does come up often, because what works for a structure for someone who's either foreign and owns a second property here, or even if they're a U.S. person with a second property here, doesn't necessarily work for, say, homestead, where LLCs and corps may be great for blocking estate tax or other exposures, they may cause a potential issue in getting the homestead once that person has evolved into a U.S. permanent resident or citizen and has the ability to claim Florida homestead and get the credit or protection and less property tax exposure.

Shawn Amuial: Logan, I'm going to stick with you and switch topics here over to Opportunity Zones (OZ), obviously something you have a lot of experience with. Could you give a one-minute version of why Opportunity Zone incentives exist and what they actually do for taxpayers who have a large gain to work with?

Logan Gans: Well, basically, the Opportunity Zone program was designed, it was part of the Tax Cuts and Jobs Act (TCJA) of 2017. It was a federal tax incentive designed to channel capital into designated low-income communities. The mechanism is two-sided. If there's an eligible gain and you roll it into what we call a qualified opportunity fund within a certain window, you can defer the taxable gain. It used to be there would be a step-up. And that has gone away in the current program. And then the big benefit is under the long term. After 10 years, there's an exemption on appreciation. And at the end of the day, this becomes a very interesting program.

Shawn Amuial: Sean, from an international perspective, can foreign investors use OZ incentives?

Sean Tevel: So they can, and essentially the way the rules work there is that to the extent that their OZ investment is a real estate investment and generates U.S. trader business or effectively connected income, they can defer that income with the OZ benefit. Right now, the OZ deferral rules under 1.0 is only 'til the end of 2026. So we're not seeing it too often. But with that being said, there's also the consideration, and you see this with 1031 exchanges as well, that an OZ deferral or a 1031 exchange deferral is only as valuable as it is if there is a local law equivalent to it, right? So if there's a, for instance, if we had an example of a Brazilian investor that was making an OZ investment or a 1031 exchange in the United States, but that income is going to be taxable in their home jurisdiction, there's no real benefit to it because they're going to have essentially deferral of U.S. tax, but they would have gotten a foreign tax credit at home for their U.S. tax that they would pay. An example I think for that is Canadians don't have 1031 exchanges. So for Canadians that own personal rental properties in their own name in the United States, if they sell that property into a 1031 exchange or an OZ investment, they're still going to have their Canadian taxes on the sale. One other thing to take away here too is that as part of the One Big Beautiful Bill Act of last year, the opportunity zone incentives were extended in a 2.0 program that will be made permanent for new investments made after December 31, 2026, so January 1, 2027, onward. And this could be an area that's very hot for investors – probably more domestically than international – starting at [the] first quarter next year, so it's just something for people to keep an eye on, and that may be our next podcast in a few months.

Shawn Amuial: Looking forward to it. And I think we are just about up on our time here. So we had about 10 or so different questions, touched on a bunch of different topics. And surely we barely just scratched the surface. If I'm hearing the two of you, it sounds like the lesson to drive home here is let's have a conversation before you sign any documents. So, with that, gentlemen, thank you so much and until next time.