When Your House is Owned by a Corporation, Central American-style

I get emails . . . and one of them gave me the idea for this newsletter.

In many parts of the world (Central America is what I usually see) it is common to own real estate in a corporation--including your house.

For a U.S. person buying a house to live in, this creates a tax headache. That corporation is a "controlled foreign corporation" and as a result you face two types of problems.

Paperwork problems

Form 5471 must be bolted onto your income tax return. It's expensive to prepare, so your tax return preparation costs skyrocket.

And no, you can't use the dormant CFC process because your house is probably worth more than $100,000. See Instructions for Form 5471 (rev. 01-2025), pp. 9-10, which references the authority for this process: Rev. Proc. 92-70.

Tax problems

House-inside-a-foreign-corporation is reverse alchemy: it turns gold into lead.

No IRC §121 capital gain exclusion when you sell your home (this is the $250,000 capital gain exclusion)
Tax alchemy turns long term capital gains (taxable at 23.8%) into Subpart F income (taxable at ordinary tax rates--up to 37%)
If there are local country capital gains taxes when you sell the house, you can't get U.S. foreign tax credit against your personal income tax liability--because your corporation paid the income tax, not you.

The right strategy when you buy

When in Rome, etc. etc. You're going to put your house in a company because everyone does.

Buy in the right type of company

At the time of purchase, put it in the right kind of company. Specifically, pick a type of company that is eligible for the "check-the-box" election.

Look at the last page of the instructions for Form 8832. Find your country. There is a type of company there that is listed. That type of company is not allowed to make the "check-the-box" election. Use any other type of company that exists in that country.

Example: Panama.

A Sociedad Anomina cannot make the U.S. tax election to be reclassified from "corporation" to "disregarded entity." You can see this in the Instructions for Form 8832, on page 7.

But an S.R.L. (Sociedad de Responsabilidad Limitada) is not listed in the Instructions for Form 8832, so you can make the "check-the-box" election for an S.R.L.

The effect of the "check-the-box election" is to make the Panamanian S.R.L. to be treated as a disregarded entity: it doesn't exist for U.S. tax purposes. (Panama neither knows nor cares about the tax election you made for U.S. tax purposes).

File Form 8832 with the IRS

If you buy your house in an S.R.L. and file Form 8832 with the IRS, then the S.R.L. is disregarded for U.S. tax purposes. It's like you own your house directly, in your own name, for U.S. tax purposes.

What if it's too late?

If you bought your house and it is owned by a corporation, you have two choices:

Suck it up. File Form 5471 every year, and suffer the unpleasant tax results when you sell the house.
Do something about it.

The "do something about it" strategy (I will again refer to Panama):

Form a new Panamanian S.R.L. (an entity that is eligible to make the check-the-box election).
Merge your Panamanian S.A. into the Panamanian S.R.L., with the S.R.L. being the surviving entity, with you as the sole owner. (This is an "F" reorganization for U.S. tax purposes, and is tax-free if you do the paperwork).
Correct the deed to the house so it shows the S.R.L. as the owner of the property.
Make the check-the-box election for the S.R.L.
File all of the necessary U.S. tax hoo-hah with your income tax return for the year in which you did this.

Important to note: the check-the-box election creates a "pretend" sale event. Any appreciation in value in the house will be taxable income for you in the United States.

Therefore, you would do this if the current value of your house is more or less the same as what you paid for it (plus capital improvements). Or, in tax jargon terms, current fair market value equals basis. Your "pretend" sale would yield zero capital gain, so no U.S. income tax liability.

If the house's current market value is greater than basis, then the difference will become capital gain for the S.R.L., which is Subpart F income for you, which means you have some income tax to pay to the IRS.

Estate planning for your house-in-a-corporation

Whether you have your house in an S.A. or an S.R.L (again, using the Panamanian example but this is generally true throughout Central America), what happens when you die? All else equal, you'd rather not have the share transfer tied up in local legal proceedings before being passed on to your next-of-kin.

You should not be the owner of the S.A. or S.R.L. Instead, create a U.S. limited liability company of which you are the sole owner. The U.S. LLC will own your S.A. or S.R.L.

Now, if and when you die, the asset that must be transferred to your next of kin is ownerhsip of a U.S. LLC. This transfer occurs under U.S. law, and is probably easier for your family to manage efficiently. From the Panamanian point of view, a Panamanian company is owned by a U.S. company and nothing has changed, so there is no reason to have probate proceedings in Panama.

For extra added enhancement, your U.S. LLC is owned by a simple revocable trust. The trust ensures that transferring the U.S. LLC at death are simple, quick, cheap, and efficient.