As US citizens, we pay US income tax on our worldwide income. This means Uncle Sam wants his cut of your capital gains and rental profits no matter where they’re earned. Here’s how to cut out the IRS, buy and sell property in Belize, and pay zero income tax in the United States.
I’ll focus on Belize because this country has no capital gains tax. There’s no need for tax planning when you invest in a country with a capital gains rate of 20% or more… a rate similar to the US rate.
That is to say, the US capital gains rate on long term gains is 20% (not including the Obamacare 3.8% bump which will probably go away under Trump). If the country where you buy and sell real estate has a 20% rate, you’ll use the Foreign Tax Credit in the US to eliminate US tax on the sale.
Likewise, if you sell a property in Nicaragua, where the capital gains rate is 10%, you’ll pay about 10% to Nicaragua and about 10% to the United States.
So, no US tax planning is required when your country of investment has a capital gains rate equal to or higher than the United States. US tax planning for an investment in Nicaragua will reduce your capital gains rate by 50%.
Tax planning in a country like Belize, with no capital gains tax, can mean you pay zero income tax on your transaction… nothing to the United States and nothing to Belize.
You’ll find that Belize is one of the best countries for real estate investments. Returns are solid, occupancy rates for rentals are high, and the investment climate makes transacting relatively easy (compared to Latin America or the Caribbean).
Your effective tax rate on rental profits in Belize will be about 3%. You can reduce this by taking the usual deductions and expenses against income. Because of the low rate, many just pay 3% on gross income and don’t bother to file a tax return.
There is no capital gains tax in Belize. When you sell your property, you pay zero to the government.
If you don’t have a tax plan, US citizens and green card holders will pay 20% in capital gains tax to the United States. No tax in Belize means no Foreign Tax Credit to net against your US rate.
Here’s how to buy and sell property in Belize and pay zero income tax in the United States
- Use your IRA or 401-K
If you don’t want to pay 20% to the United States government when you sell a property in Belize, buy that property in your retirement account. Capital gains from foreign real estate transactions will flow into your US IRA tax free if you have a ROTH and tax deferred if you have a traditional account.
Remember that I’m talking about eliminating US capital gains tax. You’ll still pay tax on the gain in the country where the property is located. If that rate is zero like in Belize, you pay zero tax. If that rate is 10% like Nicaragua and Mexico, using your IRA cuts your total tax cost in half. If you buy property in Chili or Japan, with 20% rates, using your IRA will make no difference.
There are a few rules to keep in mind when you buy foreign real estate in your IRA. For example, you can get a mortgage, but it must be a non-recourse loan. Neither you nor your IRA can guarantee the loan if you will invest IRA money.
Also, if you use a mortgage, or operate a business on the property, such as a hotel, you need to plan for Unrelated Business Income Taxes. In most cases, you can eliminate this tax with an offshore UBIT blocker corporation.
I should also point out that you can’t live in the property. If you invest using your IRA, it must be a rental or traditional investment. You can’t benefit from or use the property.
Basically, if you buy a rental property without a mortgage, the transaction will be very simple and efficient. If you need a mortgage, or have other complex issues, you’ll need the help of an expert.
You have the option of moving your entire IRA out of the United States and into an offshore IRA LLC, or you can use a US custodian and a self directed IRA to make the investment. You might be able to convert a defined benefit plan into an IRA and then make the investments.
- Buy and sell with a 1031 Exchange
Another way to defer US capital gains tax is to swap your foreign investment property for another foreign investment property. If you want to exchange one property for another, you can structure a 1031 exchange.
When done correctly, a 1031 exchange will defer US capital gains tax until you sell the second (newly acquired) property.
Note that the properties being exchanged must be similar (like kind) and both must be outside of the United States. You can exchange one US property for another US property, and one foreign property for another foreign property, but you can exchange a foreign property for a US property.
The level of difficulty of buying a foreign property inside of a US IRA is about a 2 out of 10… it’s relatively simple. Structuring a foreign 1031 exchange is about an 8 out of 10. I recommend this for large transactions where you’ve already identified the second property.
Note that a 1031 exchange will defer capital gains tax but not eliminate it. The only way to cut out Uncle Sam completely is to invest through a ROTH or an offshore life insurance policy as described below.
For details on how to setup an international 1031 exchange, see: The Offshore 1031 Exchange – Pay Zero US Tax on Your Foreign Real Estate Sale
- Buy property inside an offshore life insurance policy
You can create the equivalent of a massive offshore IRA account, without the contribution limits and distribution requirements, by setting up an international Private Placement Life Insurance policy (PPLI). All gains in the policy will be tax deferred until distributed to you (the insured) or tax free if held in the policy until your death and passed to your heirs.
You can buy rental and investment real estate in the policy and invest in just about anything you like. Because any gains in the policy will be tax deferred or tax free, a PPLI policy can eliminate capital gains tax on foreign real estate transactions.
You can also borrow against the policy. The ability to take loans gives you access to the funds in the policy and allows you to further defer taxes compared to taking a distribution.
Because of the costs of structuring a PPLI, the minimum investment required is typically $1 to $2 million. Most policies range from $2 million to $10 million.
For more on PPLIs, please see: Benefits of Private Placement Life Insurance
Because US citizens are taxed on our worldwide income, it takes a lot of planning to eliminate US tax on capital gains. If you have cash in a retirement account, that’s the easiest way to defer or eliminate US tax on your investment income. If you want to create a massive IRA like structure, consider a PPLI.
I hope you’ve found this article on how to buy and sell property in Belize and pay zero income tax in the United States helpful. For more information, or to setup an offshore IRA LLC or PPLI, please contact us at firstname.lastname@example.org or call us at (619) 550-2743. We’ll be happy to work with you to structure your international investments in Belize or elsewhere.