The Best Way to Own Overseas Real Estate

I paused to consider what I’d just heard.

“Really? Fifteen rental properties around the world? Why, you’re a bona fide international real estate magnate!” I said. “How do you hold them? Please tell me they’re not in your own name! Otherwise, your estate planning is going to be a hot mess.”

The lady explained that she’d created limited liability companies (LLCs) or their local equivalents in every country where she had property. But, she said, managing them was a full-time job.

“So then why don’t you pay yourself for it?” I asked. “I mean, if you’re doing all this work, you should be getting something out of it beyond the rent.”

She paused. “I hadn’t thought of that,” she replied. “I didn’t even know it was possible.”

It certainly is. In fact, given the runaway success of Ronan McMahon’s Real Estate Trend Alert, I’m meeting more and more people getting into global real estate mogul territory.

When they do, this is what I tell them.

The US, the UK, and the latter’s ex-colonies practice common law. It’s a set of legal doctrines and assumptions that go back to the English Middle Ages. But most countries where people invest in foreign real estate—Like Europe and Central America—tend to be under civil law. Under common law, you can decide who gets your property when you pass on. Under civil law, you must follow their rules.

That’s why it’s important to create a legal structure like an LLC to own your foreign properties. Instead of going through foreign probate under civil law, you make your heirs partners in the LLC. When you pass away, they continue to own it through that structure. No estate problem.

If you have enough property around the world—say, anything more than three properties in separate countries—having all these LLCs can become a big deal. They have annual reporting and tax filing requirements, along with other ongoing obligations that need to be fulfilled.

At some point, it often makes sense to create a tiered structure to own all this foreign property.

For example, let’s say you have three or four LLCs around the world, owning property in different countries. Those LLCs, in turn, can be owned by an LLC based in a country that doesn’t tax foreign-source income, like Panama. So instead of the income from all those foreign LLCs appearing on your own 1040 form at tax time, it’s just the income to the Panamanian LLC that you need to worry about. (Remember, LLCs are treated as “pass-through” entities by the IRS, which means you’re taxed on their income as if it went directly to you.)

That’s part of the puzzle, but there are other important considerations.

For example, at every stage, your LLCs will be reporting income on a net basis. Your taxable rental income will be reduced by any expenses incurred by the LLC, like property taxes, legal filings, and so on. The same would apply to your “master” LLC in Panama.

So instead of paying US income tax on all your global rental income, you get to deduct most or all your expenses and pay tax on that.

Now, let’s say that you’re actively managing your Panamanian LLC. You are entitled to pay yourself a salary for doing so. You will still be taxed on the income that goes to the LLC itself, since it passes through to you personally, but that income will be reduced by your salary. Depending on how the numbers work out, you can reduce your tax burden that way.

But it gets even better. If you create an asset protection trust in a jurisdiction like the Cook Islands or Nevis that doesn’t tax trust income, you can vest ownership of your Panamanian LLC in it. You no longer own that LLC, so the net income from your global real estate empire no longer passes through to you as an individual. But you can still be an employee of the Panamanian LLC, managing all the real estate, and paying yourself a salary to do it.

For the cherry on top, if you do this work whilst living in a foreign country, you can claim the foreign earned income exemption on the income you get from managing the Panamanian LLC and be completely exempt from US income tax. And if you live in a country other than Panama, one that also doesn’t tax foreign-source income like Costa Rica, you won’t have to pay tax there either.