• INTERVENTION & REGULATION
US – CALIFORNIA
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OUR ADVICE... Foreign investors in U.S. CRE must carefully consider the tax and regulatory implications of investing in the U.S., including the following:
reporting companies formed or registered between January 1, 2024, and January 1, 2025, will have 90 days. Thereafter, the deadline is shortened to 30 days from formation or registration. Failure to comply with the CTA can lead to serious civil and/ or criminal penalties. Previously, foreign investors could use complex ownership structures to avoid KYC compliance, but the CTA now reduces the anonymity foreign investors once enjoyed and makes it more difficult to use shell companies to hide the true ownership of U.S. real estate assets. The CTA will promote greater accountability in foreign CRE investment but in turn introduces additional regulatory hurdles and reduces anonymity for foreign investors in the U.S. real estate market.
country of residence states otherwise. The Blocker Corp structure has become increasingly popular as a result of recent tax reform in the U.S. which reduced the federal corporate tax rate from 35% to 21%. While the blocker structure is most commonly utilized, there are other strategies for U.S. real property investment depending on the specific goals of the foreign investors that also provide tax planning benefits, including investment in domestically-controlled Real Estate Investment Trust (REITs), partnerships, limited liability companies, joint ventures, and sometimes even direct investment. New Regulatory Compliance – The Corporate Transparency Act (CTA) directs the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a private national registry of all persons who directly or indirectly manage or own at least 25% of an entity formed or operating in the U.S. In addition, those persons who file company applications on behalf of reporting companies, such as attorneys, paralegals, accountants, etc., are also required to provide certain personal information. The law is carefully written so as to provide a look through for layered entities to determine ultimate beneficial ownership. The CTA is intended to combat money laundering, tax evasion, and the use of shell companies to facilitate illicit activities. Reporting companies formed or registered before January 1, 2024, will have one year to file initial CTA reports, while
domestic industries and properties from foreign ownership has prompted some jurisdictions within the U.S. to propose regulations aimed at limiting foreign investment in both residential and commercial real estate. Between January 2023 and July 2024, at least 22 U.S. states have proposed and/or enacted legislation regulating foreign ownership of real property. States have differed in their approach. Some states have enacted information gathering laws which mandate disclosure of, or require studies on, foreigner-owned land. Other jurisdictions have adopted legislation that makes it illegal for a non- citizen nonresident to own agricultural land or prohibit ownership of land within a certain radius of military bases, airports, public utilities, or other economically valuable sites. In certain contexts, some states have even considered or passed laws requiring divestiture of existing foreign owned properties which were already foreign owned at the time of the law’s passage. California has seen several similar bills which propose restrictions from foreign acquisitions near military installations and restrict the ownership of agricultural land. To date none have been written into law. In spite of this trend, California remains a highly desirable real estate investment target for foreign investors given its ideal weather, strong business and job market, and exceedingly high rental demand.
U.S. Income, Withholding, and Inheritance Tax – A non-U.S.
individual investing in U.S. real estate is generally subject to negative tax consequences which include income and withholding tax on rental income and distributions made to parties outside the U.S., U.S. income tax on rents, additional income and withholding tax on sale of the property under the Foreign Investment in Real Property Tax Act (FIRPTA), and U.S. federal estate tax (and in some cases state inheritance tax) upon transfer of the property after death. To mitigate the impact of these tax laws, many foreign investors use a “blocker” structure, which involves creating a U.S. corporation (a “Blocker Corp”) to hold the property. The tax attributes relating to the property are taxed to the Blocker Corp at the corporate level, thus blocking the foreign investors from direct exposure to FIRPTA and U.S. estate and gift tax. Investors may wish to fund the Blocker with both capital and a debt instrument, as interest paid on the debt instrument can be deductible to the Blocker Corp to offset its rental income. The disposition of stock in the Blocker Corp is generally not treated as a sale of U.S. real property but rather as the sale of an intangible investment security which is not subject to U.S. capital gains tax, unless a tax treaty between the U.S. and the investor’s
Founded in 1992, Blanchard, Krasner & French offers high quality legal services from its office in La Jolla, California. We serve a diverse base of clients ranging from large financial institutions to local and regional enterprises and individuals. Our attorneys have broad domestic and international legal experience in the following
practice areas: • Real Estate • Trust, Tax, and Estate Planning • Corporate and Securities • Financial Institutions • Appellate Practice • Civil Litigation • Intellectual Property • Labour and Employment • Family Law
California Property Tax – In addition to income taxation, most U.S. states
levy a property tax based on the value of real property and personal property used for business purposes in the state. California’s property tax rate of one percent (1%) of the assessed value of the property is among the lowest in the U.S. and does not increase annually with the value of the property as with most other state jurisdictions. Rather the property tax only increases by a nominal fixed rate adjustment until there is a change in ownership or new construction. California’s relatively low property tax offsets its higher income tax rates and bridges the gap with other states which may have lower income tax rates but significantly higher property taxes.
Attorneys at Blanchard, Krasner & French strive to maintain “small firm” accessibility, service, and attention to our clients. We offer more than just technical legal expertise; we take a creative, intelligent, and pragmatic approach to getting transactions closed and disputes resolved.
www.bkflaw.com
Q3 What are the current trends in California real estate?
is experiencing a push towards sustainability, with a growing emphasis on eco-friendly and energy-efficient buildings that meet high California environmental standards for new developments. Q4 Is there rising hostility in the U.S. to foreign ownership of property? A cautious global outlook, combined with growing populist sentiment in U.S. politics, has led to increased scrutiny and potential restrictions on foreign investors. The shift towards protecting
Southern California. Investment in traditional office space in California has largely been shaped by COVID-19 and a nationwide push towards hybrid and remote work models. However, a notable trend within the office sector is the rise of adaptive reuse projects. Older vacant office buildings are being converted into residential units, mixed-use developments combining residential, retail, and office spaces, or even innovative workspaces with the aim of drawing employees back to the office. Major hubs like San Francisco, Los Angeles, and San Diego are seeing stronger focus on mixed-use developments targeting resolution to housing shortages and urban revitalisation. Concurrently, California
California’s CRE market is characterised by several notable investment trends. Industrial properties have remained one of the most attractive sectors for investment in California CRE due to consistent growth in e-commerce and increasing demand for logistic facilities. Investors are focusing on warehousing and distribution centers near transportation hubs to capitalise on demand and to meet consumer delivery expectations, particularly in
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