You are correct that an S Corp. will not work. An LLC will work. You have not indicated what state the property would be purchased in which could dictate the filing requirements of tax returns. The investor would be required to file tax returns in the US, and probably subject to witholding on the rental income he would receive.
Phillip M. Smith Jr.
Los Angeles Tax & Business Attorney
Licensed in the United States Tax Court
Call: 323-292-4116 or 562-505-1004
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is firstname.lastname@example.org.
A non-resident alien (NRA) is subject to federal income tax ata flat 30% rate, absent tax treaty benefits, to the extent such items are not effectively connected with the conduct of a trade or business within the U.S. (ECI), of the gross amount of certain designated "fixed or determinable annual or periodical gains, profits, and income" (FDAP - generally investment-type and compensation income, excluding capital gains, but including rents). Aside from the flat 30% rate of tax on FDAP income, an NRA directly or indirectly engaged in a trade or busines in the U.S. is subject to tax on that income at the normal graduated rates (ECI). Gains from the sale or U.S. real property interests are generally treated as ECI.
An NRA's income from the ownership of U.S. real estate may not constitute ECI. For example, your NRA's triple net lease should not give rise to ECI. To avoid the flat 30% tax on gross rent if it is FDAP income, he can elect to treat his real property as income connect with the conduct of a U.S. trade or business and, therefore, obtain the benefit of the deductions associated with the property.
There is a whole separate regime of considerations for estate and gift tax.
As to the entity, yes, an LLC makes sense.
Since the non-resident is not managing the property and wants to limit his/her exposure to liability, he may consider a different holding structure than an simply acquiring through an LLC. One structure that may help limit his risk is to have him invest his money in a newly formed Limited Partnership. He would acquire his interest in the partnership as a limited partner. His U.S. counterpart would be the General Partner of the partnership. The Partnership, not the individuals, would organize a new LLC. The LLC would then be funded by the Partnership and the LLC would then purchase the property with those funds.
Information I provide in this forum is not legal advice. The information provided is only general information that may or may not apply to you and may or may not be based on current law. I am NOT YOUR attorney. For specific legal advice you need to contact an attorney and enter into a retainer with that attorney.