Jello Shot Number 2.
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Just finished a private mortgage project with a nonresident lender. U.S. partnership bought commercial real estate. Thought you should know how these work.
The good stuff
The borrower gets a tax deduction in the U.S. for mortgage interest paid.
The nonresident lender doesn’t pay U.S. income tax on the interest income received from the borrower even though a U.S. taxpayer is paying the interest.
How it works
Normal mortgage. Make it 30 year fixed interest, fully amortized. Or floating interest rate. Whatever you want. The debt is secured against the real estate so if the borrower flakes out, the lender can foreclose. In other words, standard real estate finance.
The borrower gets money to buy real estate (good). Borrower gets a tax deduction for mortgage interest paid (good).
The lender ordinarily gets taxed at 30% on the interest earned on loans to U.S. borrowers. We make that go away — the new U.S. tax rate is zero. (Very Good).
Why it works
Application of multinational debt financing concepts.
Think of IBM in its heyday. European pension plan says “I’d buy those bonds but I don’t want to pay U.S. tax on the interest you give me.” IBM goes to Congress and whines. Congress creates an exemption making certain types of “foreign lender/domestic borrower” situations tax-free.
You use that exemption, even though you’re not IBM.
Any kind of borrowing. Working capital lines of credit for businesses work well, too.
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