What Foreign Developers Should Keep in Mind

MIAMI—All developers have to navigate IRS reporting requirements. Foreign developers—and buyers—have an even more complex landscape to navigate.

GlobeSt.com caught up with Alan Lips, a partner at Gerson Preston Robinson, to get his thoughts on the topic. In case you missed our previous exclusive chats with Lips, go back and read: What's Driving Chinese Investors to Miami?; Attorney: Cesspool of Legal Issues in Cuba CRE; and A Word of Advice for Foreign Investors.

GlobeSt.com: How are developers navigating current IRS reporting requirements that require they report buyer deposits as income?

Lips: While the trend in today's cycle to require as much as 50% buyer deposits has been a major asset for developers and created a healthier real estate development market, it is also exposing these developers to greater risk thanks to the existing IRS rule that requires they pay tax on projected income from projects still under construction. The federal government has proposed new rules that would alleviate this requirement to instead embrace a 'completed contract' method, allowing condo developers to pay taxes only after completing and closing on their development projects.

With proposed changes in limbo and so much at stake for developers, our recommendation has been to consider the use of the proposed regulation in order to defer the tax payments until the cash from the closings is in hand. We are working closely with developers and attorneys who are drafting comprehensive legal arguments and opinions to support this measure.

GlobeSt.com: Are there any other new reporting requirements that are creating challenges for developers or ones that they should know about?

Lips: There aren't really any new reporting requirements from a domestic perspective but there are certainly a number of challenges that have arisen due to the influx of foreign buyers on the land acquisition and development side. While it has certainly been a huge boon to the local economy, these foreign investors must be very careful to ensure they are appropriately structuring their assets in a way that maximizes the value and minimizes the tax burden they face. 

With the right tax structure, they can create a wealth of opportunity to grow their capital. But mistakes can be costly and painful to fix. 

For example, many foreign buyers and developers purchase real estate in an offshore corporation with the intent to rent and sell for significant appreciation and gains.  What they end up doing though is making themselves extremely vulnerable to much steeper tax rates.

Instead, I counsel my clients to consider an irrevocable trust structure as opposed to a corporate structure.  With capital gains at 20% for trusts and close to 40% for a corporation, the savings are massive. Setting up the proper structure at the outset is critical, otherwise it can be very costly to fix.