An Active Participant

How Your Real Estate Investments Overseas Could Yield You Up To US$195,200 Per Year In Tax-Free Money

If you are living and working abroad and in the business of real estate, you can realize some great tax benefits. I’m speaking of an opportunity for the investor who spends a significant amount of time and effort working his offshore real estate holdings, not someone with one or two rental apartment units.

The typical investor in offshore real estate is able to deduct his losses against other passive income. If you do not have any other passive income, losses are carried forward until you can use them.

However, an exception to this rule applies to a) active participants and b) material participants in the management of offshore real estate.

As an active participant in offshore real estate, you can deduct up to US$25,000 of passive losses against other income (such as wages, self-employment, interest, and dividends) on your U.S. tax return. How do you qualify as an “active participant”? You must share in the management, financial, and operational decisions of the property and be knowledgeable in the day-to-day issues (by reviewing financial statements and other documents produced by the manager, say). This means you should be responsible for arranging for others to provide services such as repairs, collecting rents, etc. You may have a paid manager for the property and still be considered an active participant, so long as you manage that manager.

In addition to qualifying as an active participant, you must also meet these additional requirements:

  • You must own more than 10% of the property…
  • You cannot be a limited partner…you must be a general partner…
  • You must be an active participant in the year of the loss and the year that the loss is deducted.

As I said, you can take advantage of this very interesting tax opportunity if you are either an active participant in offshore real estate or what’s termed a “material participant.” As a material participant, you are much more involved and in control than an active participant. As a material participant (sometimes referred to as a “real estate professional”), you are in the active business of real estate and can deduct your expenses against any and all of your other income without limitation.

It is relatively easy to qualify as an active participant in offshore real estate but more challenging to be classified as a material participant. However, if you qualify, you’ll find that you’re eligible for bigger international tax breaks and loopholes, especially if you’re also living overseas.

Specifically, as a material participant/real estate professional, you can draw a salary from an offshore corporation and qualify for the Foreign Earned Income Exclusion (FEIE). Note, again, that this tax break is available only to material participants offshore and not anyone living or working in the United States. It would be near impossible to qualify as materially involved in properties in Colombia while living in Texas.

Qualifying for the FEIE means that you can take out up to US$97,600 (for 2013; the amount is increased each year) in salary from that enterprise free of federal income tax. And, as a material participant in offshore real estate, you could make use of a number of other tax mitigation strategies, as well.

To be classified as a material participant or real estate professional you must be active year-round in the operation of your offshore real estate business. You must work on a regular, continuous, and substantial basis, and offshore real estate should be your primary occupation. If you work a full-time job and do real estate on the side, you are probably not a real estate professional.

In other words, a qualified offshore real estate professional can deduct his or her expenses against all other income, regardless of source and without limitation and draw out up to US$97,600 in profits free of federal income tax. If a husband and wife both qualify as material participants and for the FEIE, they can each take out an annual salary of US$97,600, for a total of US$195,200 of tax-free money.

Live and Invest overseas Editorial Staff

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