Itās definitely the best investment from a transparency and liquidity standpoint
Reading the horror stories of the property fund investors and watching the timelines get mangled is scary!
If you are an Iberis client, please see this: Iberis is extending the Greytech II fund lock-in... probably without your knowledge or consent.
THIS IS AN URGENT MESSSAGE REQUIRING YOUR ATTENTION AND ACTION!
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The rights of immigrants to Portugal are being threatened. At this point proposed laws seek to revoke the rights of ARI (residence by investment ) applicants , but any category of immigrants could be next. Please sign this petition sponsored by PAIIR asap . If the group of Portuguese industry and legal leaders obtain 7,500 signature the group will secure the right to participate in parliamentary discussions about the bill and represent itās members and us.
Please help before itās too late. https://peticaopublica.com/pview.aspx?pi=PT115859. To join the petition you need you name, email and NIF or identification residence card or passport number) .
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For anyone who has investment funds in a foreign country (e.g., Golden Visa Real Estate Investment Fund), and has dealt with IRS Form 8938, I am curious how you or your CPA classified the real estate fund. Because in my case, my CPA put the fund as a āDeposit Accountā but I think it is clearly a āCustodial Accountā. Maybe it doesnāt matter but I would like to do it correctly. Does anyone have experience here and could offer advice? Much appreciated.
Not a CPA, but Part IV of the 8938 is for āExcepted Specified Foreign Financial Assetsā, and allows you to indicate that a certain account (like a real estate fund) is mentioned elsewhere on its own 8621 (which you need to file the PFIC/QEF election). So I would imagine for most GV investors that the 8938 is very simple and the complexity is all on the 8621.
Maybe if you have separate account numbers for your bank account and the account that holds the funds it would be worth mentioning both, but in general I feel like if you are giving all the applicable information and youāre not underpaying any tax or hiding anything, itād be hard to see how the IRS could fault you.
I see your point that Section IV of Form 8398 indicates that if you already reported the assets on Form 8621 then you donāt need to complete Form 8398 in full, but instead mark that you completed a designated number of the forms 8621. It makes sense to avoid reporting duplicate information. This seems clear, but at first I couldnāt fathom when there would ever be a case where you would file 8621 but not 8398.
I guess there are such situations, because the IRS has a chart to clarify:
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After three years of operation, my successful real estate renovation fund hasnāt produced any capital gains; all earnings have been declared at the higher āordinary incomeā rate on my PFIC statements. That means paying 30%+ taxes vs. 15% taxes, which is a big hit!
I wrote to the fund managers for clarification. Their accounting firm replied thus:
The Fund would only report the ānet capital gainā to its Unitholders for a taxable year in the event that it disposed an investment/capital asset and derived the net capital gain (the excess of net long-term over net short-term capital gain) for the taxable year. Additionally, the amount of the Fundās net capital gain for a taxable year may not exceed its total E&P available for the taxable year.
Does anyone have the knowledge and experience to translate this into layperson-English? Will unitholders ever recognize capital gains in practice? Will we pay capital gains taxes again at the time of disposition, on the same retained earnings of the subsidiary for which we already paid ordinary income taxes during the year they were earned?
I get the impression that Portuguese tax concerns and strategies are not similar to American tax concerns and strategies. I am fearful that PFIC investments may be even more tax-disadvantageous for Americans than I had anticipated, and I already knew it was pretty bad. But Iām happy to be pleasantly surprised.
In a perfect world, if we are ever going to receive capital gains treatment for any of our yield, it would be helpful to know the approximate split before the end of the tax year, so that other bracket-optimizing steps can be taken. Once I have some rudimentary grasp of how any of this works, Iāll try to engage with the fantastic folks at my investment fund to see if anything can be done. But currently I feel like I do not have a clear understanding of this arcane topic.
What are your experiences with PFIC earnings in your various investment funds? If anyone like @jb4422 knows how this all works, your expertise is warmly welcomed!
Remember how I said that these funds are pass-through entities, and what happens to the fund is what happens to you? This is all that is happening.
The real estate fund is probably generating income from rent or such. That is income. Since the fund is receiving income, it is reporting to you your prorated share of that income for you to report to the IRS.
It doesnāt sound like the fund sold any property. Therefore there would be no cap gains.
If the fund owned companies that paid dividends, those dividends would be passed through to you.
If/when the fund does sell property, then if there are cap gains, those cap gains will be reported to you in the year that the sale is made for you to report. Until then, the increase you see in the value of the fund would be the result of āhow we are marking the value of the properties if we were to sell themā.
This continues every year through to the end.
The fund may or may not write you a check at any point along the way, which may or may not have any relationship to profit or losses. However, this is a ādistributionā, which is NOT a taxable event. (I think one fund does use the word ādividendā in describing their annual payout. This is unfortunate because it is a non-taxable distribution. I imagine it is an error in translation.)
In the last year of the fund, they are going to sell all the remaining assets; in that year, all the cap gains will pass through to you. Then, you get all your cash back. You end up getting more cash than when you started because the fund made money over the time (hopefully!), but you already paid taxes on all that cash so the payout isnāt a separate taxable event. (Plus or minus basis, but ideally this comes out clean. Either way, you donāt get taxed twice.)
If you want to know what the income is likely to look like before EOY, you could ask the fund before EOY and see if they can tell you or not. Probably someone knows.
Portuguese tax concerns arenāt the same, no. ex. they donāt have the concept of short or long term gains. But what we are discussing here isnāt anything particularly Portuguese. Itās the result of the fact that the fund is a passthrough vehicle. Itās no different than what would happen if you bought into any number of US hedge funds. Many of which are spectacularly tax-inefficient. (A HFT fund is making a bazillion short term transactions a year. It is maybe also getting dividends on whatever share inventory it is keeping - which can be quite large. Maybe they return 30% but itās all top-tax-rate, and you have to account for that.)
Quit thinking of it as a fund. Think of it as owning a share of a partnership. Your PFIC statement is effectively a K-1. That is a far more accurate mental model to use.
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Well said, and for those not familiar with a K-1, theyāre for pass through income from a business to yourself as an individual or some cases S-Corp.
Thanks! Thatās what I was hoping for.
I know there were properties sold this year; Iām curious to see how it gets reported when we get our PFIC statements for this year (mid next year). Iāll report back.
Meanwhile, Iāll try to follow up with the fund toward the end of the year in hopes of getting a rough preview of the capital gains / regular income split.
My PFIC reported its first distribution for 2022. In 2021 I elected a QEF status.
But they threw a curve ball. They sold a company and distributed as follows:
- Ordinary Earnings = $ 0.00
- Capital Gains = $ Some Amount
- Cash/fair value of property Distributed = $ Some Amount Greater than Capital Gains
This last category (#3 above) included long term Capital Gains. So the difference is the oddball category.
Was not sure what to do with it. Although for this year claimed it as āother foreign incomeā. But I am not sure that is the best treatment of this category.
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Is it possible the capital gains (2) is just the sale value (3) minus the cost basis?
Not a CPA so take this with a grain of salt, but it seems from reading the PFIC rules that you are on the hook for the annual income or capital gains of the fund regardless of whether any distributions were made that year.
In years where no distributions are made, you would add the income of the fund to your cost basis, since you had to pay capital gains or income taxes on this money.
In years where distributions were made and the amount distributed was less than the total of income and capital gains, you are still on the hook for tax on all of that income, but the difference is added to your cost basis going forward, reducing your future capital gains when you sell the fund in the future.
And finally, in years where distributions were made and the amount distributed was larger than the total amount of income and capital gains reported, the difference should be considered a return of capital and would lower your cost basis in the fund investment.
Perhaps a more qualified poster can correct me on this, but if it was my PFIC and I hadnāt received advice to the contrary, thatās likely how I would file it. Seems like it would be hard for the IRS to argue with an explanation of āI was just following the numbers from the PFIC form provided by the fundā.
Thatās basically it. Income dividends and cap gains != distribution.
Taxation without Realization? Why Moore v. United States Matters to Taxpayers
Whatās at Stake
Depending on how it is decided, the case could have major implications for future tax policies. Section 965 was projected to raise $338 billion in taxes from 2018-2027, money which could now be at stake. The Joint Committee on Taxation issued a memo warning that āIf the Court were to strike down the tax as applied to individuals, a question might arise as to whether Congress would be constitutionally permitted to apply the MRT to corporate shareholders of controlled foreign corporations,ā adding that partnership taxes, taxation of shareholders of S corporations, taxes on mark-to-market valuations, and income of real estate mortgage investment conduits (REMICs) could all be impacted.
Has anyone forgotten to elect PFIC/QEF in US and then done a purge/buyback? I am wondering if its worth it.
Look back at the posts about performing a deemed sale. This has been discussed and researched to exhaustion.